Why Every LLC Needs an Operating Agreement

It is extremely important that every limited liability company (“LLC”) have an LLC Operating Agreement.  The LLC Operating Agreement is the core document that is referred to when issues concerning the LLC need to be resolved. The LLC Operating Agreement is the most important document for your LLC. The LLC Operating Agreement reflects the agreement among the members with respect to the affairs and management of the LLC as well as governs the relationship amongst the members of the LLC.  By having an LLC Operating Agreement, the members will be provided with a clear set of rules that all members have agreed upon greatly reducing the likelihood of disagreement between them in the future. A LLC Operating Agreement also greatly reduces financial and management misunderstandings, and ensures your business is governed by your own rules — not default rules created by your state.

Don’t Default to State Law for Important Business Decisions
Many state LLC statutes, for example, have default rules that govern how certain business decisions should be made, such as how the LLC will be managed, rules for holding meetings and taking votes, rules for the sale of the LLC, how profits and losses should be allocated, amending the Operating Agreement, admitting a new member, and dissolving the LLC.  Defaulting to state law for important LLC decisions could jeopardize your business.  If you don’t want the state to tell you how to run your LLC, it’s important that you have a well drafted LLC Operating Agreement. By having an Operating Agreement, you can decide the rules that will govern your LLC’s inner workings, rather than having to follow state default rules that may or may not be right for your LLC.

Run Your LLC on Your Own Terms
The Operating Agreement governs the operation and management of the LLC. It describes the business and economic arrangement of the members.  LLCs need to document important and material issues that could impact the members, such as profit-sharing and decision-making rules as well as their procedures for handling the departure/addition of members, and the dissolution/termination of the LLC. Without an Operating Agreement, the owners will be poorly-equipped to settle misunderstandings over the operations, finances, and management of the LLC. In addition, without an Operating Agreement, the LLC will be subject to the default operating rules created by state law.

The LLC Operating Agreement generally specifies, among other things, the business name, the official business address, the identities of the members, the way in which cash is distributed to the members, the way in which profits and losses are to be divided between the members, and how the company will be managed. The Operating Agreement should also reflect each member’s financial contributions to the LLC and the member’s ownership interests.

Even Single Owner Companies Need an Operating Agreement
Even though the LLC Operating Agreement is not required to be filed with any state agency, it is unwise to operate an LLC without an LLC Operating Agreement, even if you’re the sole owner of your LLC. It is extremely important that you create an Operating Agreement to separate yourself as an individual from your LLC, even if you are the sole owner of your LLC. Without the formality of an Operating Agreement, the LLC can closely resemble a sole proprietorship, which does not limit your personal liability for business debts of the LLC. Without an LLC Operating Agreement, the basic operation of the LLC would then be governed by state law, which may not be advantageous to the LLC, it members, or the business it conducts.

LLC Operating Agreements on the Web
Entrepreneurs and start-ups today look to the internet for cost effective methods of getting legal documents to govern their business practices and start their new ventures.   www.MyLLCAgreement.com is one example of a legal self help website that specializes in customizable LLC Operating agreements that are law firm quality without the law firm cost.  You won’t have to worry about what provisions to include in your agreement or whether it will comply with state law.  Simply complete the Customization Questionnaire and in a matter of minutes you will have a well drafted customized LLC Operating Agreement tailored to the needs of your business.

Your LLC Operating Agreement – Helpful Tips
The LLC Operating Agreement does not have to be filed with any state agency.  All states will enforce valid Operating Agreements entered into among LLC members. The Operating Agreement will only be enforced against the persons who are parties to the agreement. Therefore, it is extremely important that all members of an LLC sign the Operating Agreement.
1    Make sure the LLC operating agreement is signed by all the members.  The operating agreement will only be enforced against the people who have signed it.
2    Make sure each member has a signed copy of the LLC operating agreement.
3    Try keeping an electronic copy of your LLC agreement so it is easily accessible.
4    Make sure to “Amend” your LLC operating agreement when making a change to your business arrangement, such as, adding a member, changing the manager, making additional capital contributions to the LLC.

About the Author:
Adam Bergman is the president and creator of MyLLCAgreement.com, the market’s leading online legal website that offers customized LLC Operating Agreements.  Mr. Bergman has worked as a corporate and tax attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent corporate law firms in the United States where he advised thousands of entrepreneurs and business owners on a wide range of corporate and tax issues involving limited liability companies for the past seven years. Adam Bergman is recognized as a leading partnership tax expert and has lectured attorneys on the taxation of LLCs.