Why Do I Need an Operating Agreement for my Company?
You may be asking yourself, “why do I need an operating agreement for my company?” There are many great reasons listed below.
Avoid the State “Default Rules”
Owning a business gives you the advantage to have some control over how the business operates. States provide their own set of rules, “default” rules, that govern when companies omit to have something in place. These default rules are very general in nature. An operating agreement allows the company to have a set of rules in place that may be beneficial than the states’ rules.
For example, sometimes there is no documentation regarding the succession of the LLC in case a member passes or becomes indisposed. In most states, the default rule passes the LLC to the next of kin. This is in place to protect the LLC. However, sometimes the next of kin is not equipped to manage the LLC and its assets.
Putting these provisions in place within an operating agreement will ensure the LLC is properly managed or passed down.
Protect the Limited Liability Status of Owners
Describing the operations of the LLC within an operating agreement can protect the limited liability status of the owners. This means the owner is protected as long as they act within the guidelines of the operating agreement. In some circumstances, owners can still be held liable for their actions as “limited liability” does not mean “no liability”.
Prevent Management Disagreements for my LLC
Laying the foundation of how the business will operate can prevent disagreements or disputes down the road. Most people start or go into business with family or friends. This scenario tends to leave members less guarded than if they would be going into business with a business partner. The voting rules, contributions of members, distributions, and termination of business can all lead to disagreements or conflict.
Operating agreements can detail those provisions for all members to agree on from the start.
You may think it unnecessary to have an operating agreement for your single-member business. Establishing an LLC can heighten your credibility, and so can an operating agreement. It can show investors you are a professional business and you have plans in place for any mishaps or issues. Also remember that an operating agreement is a legally binding document. Having this agreement can be beneficial and used to establish your business is a separate entity from yourself.
Lending a Helping Hand
It is important to consider the benefits of an operating agreement for your LLC. It provides a great deal of protection for the business and its members.