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Why does my LLC need an Operating Agreement?

On Behalf of | Nov 21, 2023 | Business Consulting & Advice |

As a business owner, you have numerous options in terms of the structure your company takes. One of the most popular choices is to form a Limited Liability Company (LLC).

The most important aspect of setting up an LLC is the documentation. An operating agreement is a legal contract that outlines the structure of the corporation. It governs how LLC members interact with each other and the business.

Outlined below are some of the key benefits of having an operating agreement in place.

Liability protection

One of the key benefits of an operating agreement is that it protects both the business and the business owner from liability. For instance, if a lawsuit is brought against the company, then creditors cannot go after the business owner’s personal assets. Without an operating agreement, the business owner does not enjoy such tight protections.

At the same time, an operating agreement also makes sure that the business is protected from lawsuits brought against the business owner or LLC members personally.

It dictates your business operations

It’s difficult for a business owner to oversee all day-to-day operations. Usually, a manager or managers will be brought in to take on this role. Nonetheless, they need to do so in line with the objectives and vision of the owner.

An operating agreement can define the precise roles, responsibilities and powers of managers. The agreement can define how managers will be compensated as well as their obligations in terms of if they decide to leave the company.

The operating agreement can also include terms regarding succession. If an operating agreement is not present, such factors are decided according to the default laws of the state, which may not be in line with the owner’s wishes.

Not having an operating agreement could leave your business exposed. We help businesses with structuring and drafting legal agreements. Contact us for a consultation to discuss your options in more detail.