The Operations of an Operating Agreement

If you are a business owner chances are you own your business in the form of a Limited Liability Company (or LLC for short).

Being a business owner is undoubtedly difficult. Your time is consistently thin, and chances are the last thing you want to hear is your attorney telling you they (the attorney) strongly advise you (the business owner) to let the attorney draft you an “Operating Agreement.” Frankly, you are running your business just fine, and why do you need to spend more money on just more legal fees?

Depending on your business entity structure an Operating Agreement may be a requirement by law. If you started a “Corporation,” (S-Corp. Or C-Corp.) an Operating Agreement is required. In some states, even for LLCs, Operating Agreements are a requirement by law.

If you are a business owner, or will soon be one (congratulations by the way!), please take a moment to read the three reasons why having an Operating Agreement is so vital for you and the future growth of your company.

The reason why an Operating Agreement is so important are expansive. However, there are three very simple reasons why, no matter what, if you own an LLC, you should have an Operating Agreement.

1. Protection
2. Authority
3. Predictability (Formalities)

 Protection

LLCs are the most popular business entity in America They provide limited liability for the members (owners). To put it another way - members of the LLC are not* responsible for the debts and liabilities of the company. The company is viewed in the eyes of the law as a separate entity from the members.  There is a * next to “not,” in the sentence above, because there are certain formalities the members of the LLC must follow to keep the LLC a separate entity. One of the easiest mistakes an early business owner can make is commingling business funds with personal funds. By commingling funds, you are telling the world that you and the LLC are not separate, and in the event the LLC is sued, your personal assets are at risk.

An Operating Agreement is evidence of your intention, as the owner, to keep the LLC a separate entity from yourself.

Authority

The Operating Agreement provides evidence to the world who has authority to act on behalf of the company. Without the Operating Agreement, it is plausible that an individual could act on behalf of the company without your consent. As the business owner, you do not want to be denied financing, a loan, a bank account, or lose a deal because you have no legal evidence you have authority to act on behalf of the company.

Predictability

Not to be understated, is the importance of predictability and having your official corporate formalities in a row. Nobody wants to plan for the worst, and if you are just starting up your business, the urge to ignore these subtle formalities is 100% reasonable. However, that is why having a trusted business attorney on your side is so important. The drafting of an Operating Agreement can range from simple to whatever complexity is needed. Contact an attorney and they can talk you through how to set this up.

If you read this article and noted a need for your business, please reach out. We would be more than happy to help you either totally revise your corporate formalities, or in the event you are just starting out, start from scratch! Contact our Sioux City law firm, Sioux Falls law firm, or Omaha law firm today! For more information like the content in this blog, visit our Deal Maker blog on our website!