Operating Agreements & LLCs
An operating agreement is a contract that controls your LLC’s operations as well as member interaction with each other and with the LLC. Many people begin their LLC and want to save the time and cost of creating an operating agreement. You may think an operating agreement is not necessary for your single-member LLC - after all - why make an agreement with yourself?
Is the Operating Agreement a Legal Requirement?
Most states/jurisdictions do not require an LLC to have an operating agreement. Of the states/jurisdictions that do, some require the operating agreement be written while others permit oral agreements. No states/jurisdictions requires an LLC to file an operating agreement with the Secretary of State; instead, the operating agreement is kept with other business records. No matter what states/jurisdictions you are in, however, it is always a good idea to create a formal, written operating agreement—even for a single-member LLC. Here is why:
REASON 1 – Avoid State-Imposed Default Rules Without an operating agreement in place, your LLC is bound by the default rules of your states/jurisdictions. Most states/jurisdictions laws governing LLCs allow the default rules to be overwritten in the LLC's operating agreement.
REASON 2 – Maintain Control As the business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business-development opportunities. An operating agreement can define the manager role—designating the authority and compensation and what happens if the manager leaves or competes with the company.
REASON 3 – Keep Business and Personal Identities Separate An operating agreement helps distinguish the business from the owner for liability purposes. A major benefit of an LLC is that it limits liability going both ways: the LLC protects a member from business liabilities and the business assets from a member’s personal liabilities. Without an operating agreement in place, the business may look like a sole proprietorship. If a court does not see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers. Want to add a caption to this image? Click the Settings icon.
REASON 4 – Clarify Succession An operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down.
REASON 5 – Scalability Successful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement, the LLC will be better positioned in the investment negotiations.
Let us Continue this Conversation An operating agreement serves an important role, even for a single-member LLC. The operating agreement puts you in the driver’s seat and enables the LLC to perform its main task—to limit liability.
If you have an operating agreement in place, we would be happy to review the agreement as well as your business needs to ensure the operating agreement and LLC are in sync. Or, if your single-member LLC does not have an operating agreement in place, we will work with you to craft an appropriate agreement. Either way, calling us at 301.892.2713, is a wise business decision.