Having an operating agreement for your limited liability corporation (LLC) is the first thing you should do when starting your business. LLC operating agreements can be a life-changing decision, that protects you for so much more than practical liabilities. An LLC operating agreement is the only piece of paper to protect you, your intellectual property, clients, and more.
What Is an LLC Operating Agreement?
An LLC operating agreement is a legal document that you can customize to fit the desired terms of your company. Your LLC might be just you, or it could be made up of multiple partners.
In this article, we’ll cover the five reasons that every LLC needs an up-to-date operating agreement. Having an operating agreement is not necessarily a legal requirement in all states. Only a few states demand an operating agreement.
California, Delaware, Missouri, and New York specify the need for an operating agreement for all LLCs. It is mandatory to have an operating agreement in these states when you are going through the incorporation process.
Not having an operating agreement means that you are beholden to state laws. Should something go wrong with your company, you won’t be able to fall back on discussions in the boardroom.
Having an operating agreement should be something every business owner sets forth when launching their concept into the real world. It’s the best way to handle any misunderstandings, as well as helping you determine your business purpose.
The operating agreement is what covers you for so many issues when running a business. Usually, an LLC operating agreement in 10-20 pages in length. Keep reading for more information on how to get an operating agreement.
- Financial and Legal Coverage
In an operating agreement, each member of your organization will have their ownership noted. The ownership stake is usually expressed as a percentage point.
Each member has to obey certain rules. These rules are led by both the operating agreement, state and federal laws. Part of these rules is expert book and record-keeping.
Compensation for each member of the LLC is defined in your operating agreement. This will help you determine your tax liability.
You can also limit your personal liability with your operating agreement. Even if you’re the only member of your LLC, you don’t want your personal wealth to be at risk should something go wrong with your business.
- Define Your Partnership
Most businesses fail because of management issues. Some LLC operating agreements include non-compete agreements. Should one of your members leave with valuable intellectual property, the non-compete agreement can help your LLC stay relevant by disallowing prior members from trying to compete with your ideas.
Your LLC operating agreement further defines the purpose of your business. Should one of your members go rogue and try taking the business down a different path to the original concept, your operating agreement is your best protection.
- Avoid He-Said-She-Said
Most sample operating agreements have details regarding oral agreements. In most businesses, it’s better for all decisions to have a paper trail. Whether it’s minutes from meetings, email threads, or even text messages, none of these will be as powerful as your operating agreement in protecting your LLC.
It is very difficult to modify an operating agreement once it has been signed by all members. In signing the agreement, your members are legally agreeing to your terms. That way, you have all the paperwork you need to support you if things go wrong.
The financial assets of your business are your biggest risk factor, no matter what your business. Any disputes between payments to partners can be clarified with the right operating agreement.
Think of your operating agreement as a set of guidelines with some rules. While some aspects might put the verbal agreement into legality, others will help guide your business process.
- Clarity for Your Path Forward
Sometimes it’s hard to plan long-term for your business in the earliest days. Having an operating agreement is not just for legal and financial protection; you can use your operating agreement to see your path forward.
Forming your operating agreement can help you envision your future. You’ll have to answer questions that go far beyond your initial idea for your business.
What do you see yourselves doing in the long run? How will your profits be distributed? Can you transfer interests in the future? If so, how?
The operating agreement is a great exercise in communication. With multiple partners, the process of forming your operating agreement can shed light on potential problem areas.
You can also use this opportunity to ideate further than you might have imagined from your initial business plan. The operating agreement doesn’t have to just be about the legal. It can be fun too.
- Expand Your Operations
If your business requires a loan in order to operate, most banks will require a copy of your operating agreement. You don’t have to develop your operating agreement when you initially form your LLC, but if you want to grow, an operating agreement can make all the difference.
Private investors often require an operating agreement in order to see how their money is going to be spent. Investors often only put money into businesses that will make back the money and more. An operating agreement is an easy way to help investors make the decision to cut you a check.
If you want to take your business international, operating agreements are essential. No matter your needs, an operating agreement should be top of the list.
Where to Find a Sample LLC Operating Agreement
Operating agreement templates are readily available on our website. We highly recommend going through your business and determining whether the state has your best interests in mind, because we almost guarantee it doesn’t.
Your operating agreement is unique, so get in touch to ask us any questions about your best path forward! You can also get an LLC operating agreement today.