Why Does an LLC Need an Operating Agreement?

June 21, 2021

If you missed it last week, I talked about why you, as a company, should have an up-to-date employee handbook. Next up on my list of documents that every company should have in place is an operating agreement. If you’re asking what is an operating agreement or why do I need that, read on! 

In a nutshell, an operating agreement is a contract between the members of an LLC, very similar to a partnership agreement or shareholders agreement that larger companies have. It outlines the business’ structure and describes the duties, rights, and responsibilities of the members in both finances and operations. It also spells out what happens when someone wants to leave the business.

Another important thing that an operating agreement does is spell out verbal agreements between members, which can prevent miscommunication and misunderstandings. I cannot tell you how many times people reach out to me to set up an LLC because they are going into business with a friend, but they just want to be sure that they are protected in the event that the friendship goes south. 

If you do not have an operating agreement, your business is subject to default rules set by the state, and these might not be the rules you would like in place. For example, many states have rules that profits and losses are divided equally, but you and your partners invested different amounts and want to allocate profits and losses differently.

So why does a single member LLC need an operating agreement? In a word: protection. It can assist in solidifying the LLC protection of your personal liability and thus assets, it can protect your family from difficulties in handling the LLC in the event you cannot, and it can be another document that establishes the legitimacy of your business as a separate interest from you. Likely one of the reasons you formed an LLC is to protect you and your family’s assets; an operating agreement helps cement that.

If you don’t have an operating agreement and need help creating one, I am here to help! Feel free to reach out whenever you are ready!

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1. The information above does not constitute legal advice, nor does it create an attorney-client relationship. Please consult your attorney with specific questions.
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