An operating agreement is a private contract that controls your LLC’s operations, along with interactionsbetween the owners and the company. You may think that an operating agreement is not necessary for your LLC, especially if it’s a single-member LLC. After all, why should you make an agreement with yourself?
Is the Operating Agreement a Legal Requirement?
Most states don’t require an LLC to have an operating agreement. Of the few that do, some require that itbe written, while others permit oral agreements. No state requires an LLC to file an operating agreementwith the Secretary of State. Instead, the agreement is kept with other business records. No matter whatstate you are in, it is always a good idea to create a formal operating agreement in writing—yes, even for a single-member LLC. Here’s why:
1. Avoid State-Imposed Default Rules
Without an operating agreement in place, your LLC is governed by the default rules, or the statutes, which are promulgated by the legislature in Texas. These statutes or laws are subject to change, and might not be advantageous for the LLC’s members (the company’s owners) or its managers. Most of the laws governing LLCs allow the default rules to be overridden by the LLC's operating agreement.
2. Maintain Control
As your business gains momentum, you may want to hire a manager to be in charge of day-to-dayoperations so you can shift your attention elsewhere. You might decide to give your manager an ownershipinterest or equity stake in the LLC. An operating agreement can define the roles & responsibilities for all involved. It might designate authority, compensation, and duties, as well as what happens if the officer/manager leaves or competes with your company.
3. Keep Business & Personal Identities Separate
An operating agreement helps separate and distinguish the business from the owner, individually. A major benefit of an LLC is that it has the possibility of limiting liability–in both directions. The LLC protects a member from business liabilities, and the business assets from a member’s personal liabilities. However, without an operating agreement (& business systems) 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 is supposed to offer.
4. Clarify Succession
An operating agreement may also specify what happens if you die, or you’re unable to run the business. Inthe absence of a specific provision, your family may have a hard time dealing with the management or ownership interest of the company in the future.
5. Scalability
Successful businesses grow, but stimulating growth requires capital. An operating agreement can definehow future investors (or additional members) will be treated by the company. If you structure these terms effectively, the company will be better positioned during negotiations with potential investors down the road.
Let’s Continue this Conversation . . .
An operating agreement serves a very important role, even for a single-member LLC. It puts you in the driver’s seat and enables the LLC to perform its main task—limit liability. It can create prudent firewalls between the liabilities of the owner from the business and vice versa. If you already have an operating agreement in place, we would be happy to review it and make sure it protects you in the way you would anticipate and is in sync with its current business operations.
With A Special Offer:
If you don’t have any legal entity, we’d be happy to help you create some legal liability protection. We file LLCs for FREE (as long as you take care of the state’s filing fees). To get the ball rolling, we offer a complimentary foundation session (a $375 value), where we walk through the 7 legal building blocks, specifically tailored to your company’s needs.
By the end of your foundation session, you will know exactly what needs to be done to ensure your business is structured properly and capable of weathering the elements (both internal and external forces). Go to freellcfiling.com to schedule a free 15 minute call to discuss and make sure it’s a good fit to work together.
Alternatively, if you would like to get an operating agreement for your existing business, we can work with you to craft the perfect agreement for your situation. Feel free to give us a call at 713-489-5900 or go to freellcfiling.com for more information.
