Reasons You Need an Operating Agreement for Your LLC
No matter whether you set up a corporation or an LLC, it’s inevitable you will have business disputes at some point. Unfortunately, some of these disputes are not with outside vendors or clients, but between the owners or members of the company.
People form LLCs because they are relatively easy and inexpensive to set up. However, if you don’t do any additional business planning, you run the risk that your LLC won’t function exactly like you imagined. Taking the extra step to draft a comprehensive operating agreement can prevent some potential internal disputes and save on litigation expenses.
Sets Forth Operating Guidelines
You can include a variety of management and operational details in your operating agreement. Do you want a manager-managed LLC or a member-managed one? How will voting rights work? What is the process if someone wants out of the LLC or wants to bring someone new in? Some of these are topics that can give rise to member disputes, so spelling them out ahead of time can reduce the potential for conflict.
Being able to plan ahead to reduce disputes, unexpected events, and misunderstandings is one of the main reasons to have an operating agreement. As time goes on, members may decide they want to take the business in a different direction and that goes against everything the company was founded to do. You can address a variety of issues in your operating agreement.
Helps Create Separation of the LLC from its Owners
An operating agreement can bring added formality to your LLC and help create even more separation between it and the members. This is important to ensure you are not held personally liable for the LLC’s debts and liabilities. All your business operations, finances, and activities must be separate from your personal accounts and owner activities. Having a signed agreement can set forth specific rules and operating practices that keep the LLC a separate legal entity with no question of co-mingling funds, etc.
Operating Agreements Can Address Uncomfortable Situations
No one wants to think about their own mortality, but what happens in the event a member dies? Or what happens if two members are married and suddenly divorce? These events can have a significant impact on your LLC and how things move forward. These are not necessarily easy topics to tackle, so addressing them ahead of time in an operating agreement can remove the personal and emotional elements from these business situations. In addition, it can protect the LLC if you are operating in a state that might suddenly make the estranged spouse a member. An operating agreement can protect you from suddenly having a new member that you do not want in your business.
Operating Agreements for Single Member LLCs
You might assume that if you’re a single-member LLC, you don’t need an operating agreement. You should still have one that addresses how things work if you bring in another member. It can also detail what will happen in the event you pass away or become permanently disabled. This decreases the burden for your loved ones who have to figure out how to handle things going forward.
Consulting a Washington DC Business Attorney
If you need assistance with your LLC and drafting an operating agreement, you need to speak with a knowledgeable Washington DC business litigation attorney. The team at Tobin, O’Connor & Ewing have experience in all types of business organizations, including LLCs. Contact our office at 202-362-5900 to schedule a consultation.