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Why the Operating Agreement for an LLC is the Most Important Document to Your Business

Jun 20, 2008
Imagine there being a country without any laws? Or, think about a local school trying to operate without having any rules or processes? Without known laws, rules or processes, chaos and unrest results.

The Operating Agreement for an LLC provides the order needed to run an LLC business. Order is absolutely necessary for the success of a business.

Even with a single member LLC, the Operating Agreement is necessary. A single member LLC often forms a limited liability company to provide protection from personal liability. In order to do so, he or she must ensure he is operating his business using a separate legal entity.

If that legal entity has no rules, processes or evidence of written ownership, it shows that the single member is not even honoring the LLC. This puts personal liability at risk.

The Operating Agreement for an LLC has two major objectives. First, it evidences the ownership of the limited liability company. Everyone is in a business venture to reap the rewards of the success of the business. This is so important.

If you do not have the ownership established in an official, written LLC document for the limited liability company, then later, disputes will arise. One Member will claim he owns more. Or another may allege that there were additional obligations to be met before another Member gets his ownership.

The possibilities of disagreements and misunderstandings are infinite. The cost to address a dispute among Members can be significant and often result in total business failure.

Second, the Operating Agreement for an LLC established the rules, processes and requirements for governing how the LLC will operate and run a business. Without having a clear set of rules, no one will know what is permitted or not permitted. People will act with uncertainty.

Now, it is true that the LLC laws in most states have what is known as default provisions in the event there is no written Operating Agreement for an LLC in the state. However, they may be totally inappropriate for your limited liability company and business. The LLC laws allow and are designed for each LLC to define and determine its own structure and rules relevant to their situation.

Every Operating Agreement for an LLC should address management structure, officer authority, voting requirements and other matters important to the specific limited liability company business.

There is no such thing as a one size fits all in running a business. Make sure that you have a professional, written Operating Agreement for your LLC and that you and the other Members have thought through the matters that are addressed in the agreement.

This document is so important that it is one area where retaining the services of a competent business attorney is well worth the costs. However, it is a business reality that many new business owners do not have the resources to pay for the expert and specialized advice.

In that event, at least make sure that for the Operating Agreement for your LLC, you start off with a professional form that has been drafted by an LLC attorney experienced in this area. More often than not, the form agreements out there on the Internet are not even drafted by lawyers but just taken from cheap forms books.

In addition, some forms may be drafted by a lawyer but not one that knows and understands business and LLC matters. Do your homework and insist on the use of a complete, professional form agreement as your starting point.
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