When I form Limited Liability Companies (LLCs) for my clients, I always highly encourage them to create an operating agreement at the same time. Some clients say: “Yes, of course we want an operating agreement.” Others say: “Nah, I’ll just download one off the interweb.” And still others say: “What the heck is an operating agreement?”
First, the basics. An operating agreement is a contract between the members of an LLC that outlines how the company will be run, who can make decisions, how and when members get paid, and what happens when the company dissolves or a member decides to leave. They can, and do, get significantly more complex than that, but in a nutshell it is how the members define their vision for the company.
A good operating agreement protects you and your company in a number of ways. Most importantly, it ensures that the members are on the same page regarding key decisions. It may seem counter-intuitive, but the best time to plan for the end of a company is when you are starting a company. Some of the most expensive, complicated, and messy litigation occurs in so-called “business divorce” cases. The reality is, a lot of those lawsuits could have been avoided if a good operating agreement was in place.
Another benefit to an operating agreement is that it helps to show that you are following the formalities required for an LLC to protect your personal assets from creditors or lawsuits. I have counseled many clients to ensure that they are treating their LLC as a separate and distinct legal entity, not merely as a personal alter ego. That means not mixing personal and business funds in the same bank account, keeping clearly defined business records, and having an operating agreement in place. This is especially true for single-member LLCs. Many people form LLCs, but don’t take or keep up with these steps, which puts them at risk of losing the legal protection that an LLC can provide.
Lastly, if you have no operating agreement, you are stuck with the statutory rules. You might not like how the rules apply to your business, and the operating agreement is your opportunity to customize things. In that same vein, downloading a template from the internet is not going to be crafted to your specific needs, industry, and situation.
If your LLC doesn’t have an operating agreement, don’t worry; Boreale Law can prepare an operating agreement for you starting at just $500.00! Plus, as your business grows, Boreale Law can be your trusted partner in smart business growth, without breaking the bank. Check out our other services and price list.
Whether you need a new operating agreement, want to revise an existing one, or just want us to review your internet special, call or email Boreale Law today. Boreale Law – Let us help you find your way!