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Why Every LLC Needs an Operating Agreement

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Two business owners arguing. Why Every LLC Needs an Operating Agreement.

Two business owners arguing. Why Every LLC Needs an Operating Agreement.

Benefits of an Operating LLC System

Many business owners make the choice to operate as a limited liability company (LLC) for the personal liability protection this business entity provides. Beyond that, they may not give much thought to creating an LLC operating agreement since most states have LLC laws with default provisions that dictate how the LLC will be managed. However, your state’s default provisions may not be the right fit for how you want your company to operate.

For example, many states provide that the voting power of each LLC member should be in proportion to their investment in the company. This may not necessarily work for you, especially if you want to recognize the “sweat equity” contribution of a member as equal to another member’s financial contribution.

According to most states, LLC default provisions force members the ability to transfer their interest in the LLC as unrestricted. This is something you may not want to pursue with a partner in your business if you don’t know or don’t care to deal with as a member of your LLC.

An LLC operating agreement can also help members avoid costly and stressful events, including:

Disputes among members on the rights and responsibilities of each owner. An operating agreement will detail the specific rights and responsibilities of each LLC owner so there is no confusion.

The harm that could arise from state default laws. State default laws are one-size-fits-all, which may not be a good fit for your company. If your state laws dictate that corporate actions are subject to a unanimous vote by members, and you have problems getting everyone to agree, this could hamper the growth of your company. An operating agreement allows you to create custom rules for the operation of your LLC.

Disputes that arise due to lack of clarity. Many state default laws do not adequately address disputes. By preemptively planning for potential scenarios that could arise, such as the need for capital and the responsibilities of each member to provide it, you can address these in advance so each LLC member knows what to expect, thus avoiding potential disputes in the future.

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