When forming a limited liability company (LLC), business partners often wonder whether they really need a written operating agreement. At the outset, they may feel like they are all on the same page, so putting it in writing in an operating agreement seems like an unnecessary expense. However, this single document could prevent costly partnership disputes that may arise later, and the beginning is the perfect time to create one.
Why An Operating Agreement Is Important
An operating agreement serves to solidify each member's roles and responsibilities. It outlines how the business is to function, and addresses all financial matters, including how profits will be divided. It may include any number of rules and regulations. Once the members sign the LLC operating agreement, it becomes a binding contract.
Even for single-member LLCs, operating agreements are important as they delineate the business as a separate entity from the owner.
Why An Operating Agreement Should Be Created At The Beginning
The beginning of an LLC is the perfect time to create an operating agreement, because the plan for running the business is fresh in everyone's minds. While it may seem like everyone is on the same page, getting the plan in writing will ensure that everyone is clear about how the business should operate.
Furthermore, at the beginning, all of the members are on level ground. No one has an advantage due to the passage of time, or because of the success or failure of any business decision that may have been made. Expectations and goals may change along the way. When members want to create operating agreements further on in the business's life, it is often because something has changed or there is a disagreement brewing. An operating agreement established at the outset can prevent disagreements.