Why does every LLC need an Operating Agreement?

In celebration of Women’s Small Business Month, we are continuing our series on Limited Liability Companies (LLCs) and how to protect yourself in business. If you missed part 1, click here…>, and for part 2, click here…>

Protecting yourself and your business is very important and should not be taken for granted. Members of The Mom Entrepreneur Online Support Group share their stories about running their business on a regular basis (e.g. trademark infringement and partnerships gone badly).

My company Bisson Barcelona, LLC was once a partnership with a very loose agreement drawn up by a lawyer. Unfortunately, the LLC was formed after we split. Having this document in place prior to forming this partnership would have helped settle many disputed that arose over the course of the partnership. Forming an LLC is well worth the time and effort to ensure you are protected.

Adam Bergman, Esq., president of myLLCagreement.com continues to answer our questions this week about why every LLC also needs an Operating Agreement.

TME: Why should every Single Member LLC (1 owner) owner have an Operating Agreement?
Adam: It is extremely important that you create an Operating Agreement to separate yourself as an individual from your LLC, even if you are the sole owner of your LLC. Without the formality of an Operating Agreement, the LLC can closely resemble a sole proprietorship, which does not limit your personal liability for business debts of the LLC. Without an LLC Operating Agreement, the basic operation of the LLC would then be governed by state law, which may not be advantageous to the LLC, it members, or the business it conducts.

TME: Why should every Multi-Member LLC (more than one owner) have an Operating Agreement?
Adam: The Operating Agreement governs the operation and management of the LLC. It describes the business and economic arrangement of the members (partners). LLCs need to document important and material issues that could impact the members, such as profit-sharing and decision-making rules as well as their procedures for handling the departure/addition of members, and the dissolution/termination of the LLC.

Without an Operating Agreement, the owners will be poorly-equipped to settle misunderstandings over the operations, finances, and management of the LLC. In addition, without an Operating Agreement, the LLC will be subject to the default operating rules created by state law.

The LLC Operating Agreement generally specifies, among other things, the business name, the official business address, the identities of the members, the way in which cash is distributed to the members, the way in which profits and losses are to be divided between the members, and how the company will be managed. The Operating Agreement should also reflect each member’s financial contributions to the LLC and the member’s ownership interests.

Thanks Adam! Don't forget about our contest, which continues until October 31st. MyLLCagreement is sponsoring a giveaway to win an LLC formation, an LLC Operating Agreement and $500 for your business!

Also, on Thursday, October 22nd, The Mom Entrepreneur will host a complimentary teleseminar with Adam: Protecting Yourself in Business - Why Every LLC Needs an Operating Agreement. You must register to be on the call.

About Adam Bergman:
Adam is the president and creator of myLLCagreement.com, the leading online provider of customized LLC Operating Agreements. He has worked as a corporate and tax attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent law firms in the United States where he advised thousands of entrepreneurs and business owners on a wide range of corporate and tax issues involving limited liability companies for the past seven years. Adam is recognized as a leading partnership tax expert and has lectured attorneys on the taxation of LLCs.