An operating agreement governs the financial and functional operations of your business. It is a contract that is binding on the members of the LLC and ensures uniform and consistent handling of business matters.
Here are four reasons why your LLC needs an operating agreement:
1. Liability: An operating agreement helps give the members of an LLC protection from personal liability and confirms the LLC’s status as a true business entity. Having a clear operating agreement ensures that the LLC is not confused with a sole proprietorship or partnership. Simply filing your LLC with the state does not prevent you from being held personally liable for the debts of your business. Courts will look to many factors to determine whether your LLC is merely a shell for your personal use, such as whether company and personal funds are kept separate, whether the business was adequately capitalized, and whether an operating agreement is in place.
2. Misunderstandings among members: Perhaps your and your best friend are starting a flower business together. Or maybe you and your brother are finally opening up that restaurant you always talked about. You can never imagine arguing with this person over the operation of the business. Wake up and smell the reality: misunderstandings, disputes, and even expensive lawsuits result when people do not take the simple step to develop an operating agreement. You need to memorialize things like how much money each person is contributing to the business, how you will get paid when the business begins to take off, who will manage the day-to-day operations, and so on. There are many things to consider, but speaking with a qualified attorney can narrow the issues that are important to your type of business and make the agreement as basic as you like, or as detailed as necessary.
3. Establish your own rules: Florida has default rules that come in to play if an operating agreement is not in place for your LLC. These may not always be the most favorable for you as they tend to be vague and not tailored to any specific type of business. One of the great things about starting your own business is the ability to make your own rules – why not reduce those to writing to protect your investment? You can decide what will happen when a member dies, what the rules are if someone wants out of the business, how books will be kept, or what happens if the LLC needs more money to operate. These are just some of the things that you can plan ahead for, but your attorney can give you more ideas.
4. Make your life easier: If you have an operating agreement, your business appears more legitimate. Banks often ask for an operating agreement before allowing you to open a business account, and it may be necessary to obtain a loan. Additionally, if you are applying for an L-1 visa, having an operating agreement is important during the application process.
Operating agreements can be very simple, or they can attempt to include every possible scenario. What matters most is that you have something in place… you can always add to it later. Speak with an attorney today to provide the framework for your business and protect your most important investment.