Stephen Kaplan, P.C.

Why LLCs need written operating agreements

During the start-up business process, a written operating agreement is a necessity for a limited liability company (LLC). This document provides detailed plans regarding ownership and the duties of its members, who are the business owners. In addition, an operating agreement ensures that an LLC conducts itself in an appropriate manner while protecting the personal liability of a business.

But some LLCs question the benefits of an operating agreement. From the onset, start-up companies seek to minimize expenses in whatever way possible, and some new business owners even skip the critical step of creating an operating agreement. This is not a good idea.

Addressing ownership, rights and dissolution

From the start, implementing a written operating agreement is in the best interests of all owners involved. This legal document establishes the structure and rules of an LLC and serves as a solid resource. An operating agreement will assure that no party has any advantages due to the passage of time as well as success or failure of any business decisions.

Here are some of the crucial aspects to address in a written operating agreement:

  • Ownership: The agreement provides details about an LLC’s profits, losses and assets, and addresses their distribution among members.
  • Rights and responsibilities of members: Every owner must understand their role and the talents they bring. This section should include plans for settling disagreements and pinpoint how much weight each owner has in business decisions.
  • The addition or departure of members: An onboarding process must be in place when a new member joins the LLC. And if an owner leaves, provide detailed descriptions of what that person is entitled to receive.
  • Dissolving the company: Terms of an LLC’s dissolution should be in place. The agreement should explain how any remaining assets get divided as well as whether former members can establish similar LLCs.

After months of operating without an agreement, some members may want to revisit this topic. But their motives in returning to the negotiating table may be self-centered of for questionable reasons. It may likely be due to changes in circumstances as well as disagreements that essentially hinder the business owners, thus preventing them from reaching an agreement.

In addition, each member’s goals and expectations for the business may have changed along the way. This is why it is so crucial to have a written operating agreement in place.

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