The Importance of Operating Agreements

Everyone is fast to open a new limited liability company (LLC) to perform work, hold real estate or transact day to day business. However, once the LLC is formed, there is still a very important issue to address and that is the operating agreement for that new LLC. The operating agreement is the governing text. It is important for multiple member companies and for solo owner companies.

Why do You Need One?

If you want a business line of credit or bank loan, lenders require a copy of your executed operating agreement. As the governing document for your new business it should contain the details of how your business is operated, who are the owners/officers, and how debts and liabilities and assets and profits are split. The operating agreement is important when a sole-member wants to wind down a business or when a multi-member company has a member that wants to leave or split from the business. Those details should all be outlined in the operating agreement.

The agreement can protect your company’s status, ensure that each member abides by the rules, and help mitigate any issues or misunderstandings that can arise. Failure to have things in writing led to problems in the future. Some states have laws that govern how an LLC is to be treated when there is no written agreement. These uniform acts put basic standards in place, but they are no specifics and are very minimal. These certainly may not have a similarity to what members actually want and intend.

Worse-case scenario is letting a court decide how an LLC is to be governed. A court of law will look at past dealings and factors to determine how to address operational disputes between feuding members.

The operating agreement does not necessarily have to be set in stone. It can be amended to allow for new members, additional financial contributions or general business changes.

Basic Information for an LLC Operating Agreement

Among the items that an LLC operating agreement should address are the following:

• How the LLC will be managed by its members or proposed managers

• Who makes key business decisions

• What actions require a vote by the members (and what percentage is required for approval) – this will surely depend on the number of members

• The duties and responsibilities of the members

• How profits, losses and tax items will be allocated among members and the naming of at least one member or membership team to manage these issues

• The procedure for transferring ownership interests or bringing in additional members

• Events that could trigger the end of the LLC and how that is to be done

• Succession planning

• Dispute resolution amongst members

Missing terms can have disastrous consequences. It will certainly lead to disputes amongst members and could lead to outside legal trouble with third parties.

Other Agreement Considerations

Keep your document in a safe place and be ready to provide it to your accountant or financial professional when requested. Read the document and know what it says and makes changes are needed.

There are hundreds of online templates to get this done, but you should talk to an attorney in your state and area to get the best bang for your buck.

Always consult an attorney and accountant for assistance with the financial and legal aspects of your LLC operating agreement. I cannot personally tell you how much money could have been saved by dozens of clients if a well drafted operating agreement was put in place to begin with rather than some website template.

About the author: 

Todd A. Jones is an attorney with Anderson Jones, PLLC in Raleigh, North Carolina, a law firm with attorneys licensed in North Carolina, South Carolina and Georgia. For more information or questions about this article, please email him at [email protected].

Author’s note:

The above article is not, and should not be construed as, legal advice. For specific advice, consult with an attorney licensed in your state.