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Every LLC Should Have An Operating Agreement

Sep 3, 2008
Starting an LLC involves several steps. The first one is to file Articles of Organization with the State Filing Office (SFO). Once this is done, the people starting an LLC should prepare and sign an Operating Agreement. A few states refer to them as a Limited Liability Company Agreements. Although an Operating Agreement is not required in most states, it is still highly recommended that all LLC's have a written Operating Agreement. Some states even allow oral ones but these are hard to enforce.

This is essential in maintaining your liability protection and preventing disagreements between the members. I have witnessed bitter disputes between family members and friends concerning the details of operating a business because nothing was written down when they started out. When that happens, people often have different memories of what they agreed to in the first place.

The preparation of an Operating Agreement helps strengthen the liability protection of the LLC in the sense that it helps demonstrate or prove that the LLC is being operated as a separate legal entity even if there is only one member of the LLC.

The Operating Agreement acts as a contract among or between each member of the LLC and also between the members and the LLC as a separate legal entity. The Operating Agreement is similar to the bylaws of a corporation or the partnership agreement of a general partnership. Each document controls the internal management of the entity. The Operating Agreement itself is not a document that has to be filed with the SFO but the original should be kept with the other LLC documents and records.

There is no set or required format for an Operating Agreement. They come in many different formats. Some are long (anywhere from 10 to 40 pages long) and some are much shorter. The standard Operating Agreement will contain a certain amount of boiler plate language but also some very important provisions with respect to the rights, duties and obligations of the members of the LLC.

A basic Operating Agreement will set forth whether the LLC will be managed by the members (owners) or by certain other individuals or entities as managers. Furthermore, the Operating Agreement usually establishes the ownership percentages or sharing ratios between the members of the LLC and will set forth such things as the division of profits and the distribution of income.

Although not required, it is highly advisable for even one person or single member LLC's to have a written operating agreement. Some may wonder why. The first reason is that if a one person LLC doesn?t have some formalities or some documents, it looks too much like a sole proprietorship which has no liability protection. In addition, it should be remembered that the single member owner is not signing an Operating Agreement with himself. He is signing the Operating Agreement with a separate and distinct legal entity, the LLC.
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