Why an Operating Agreement is Vital for Every LLC

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Operating Agreements are key and may be the most important document when starting your Limited Liability Company (LLC); that goes for multi-members and single members. An operating agreement is a governing document by which all members are bound and gets the structure of the entity set so that things can be agreed upon ahead of time instead of being bound by statutes. Below are just a couple of reasons an operating agreement is vital to your LLC.

LLC Profits, Losses, and Taxes

In any operating agreement, there should be a section there discussing profits, losses, taxation, and what to do with each. This section should state how profits and losses will be allocated among you and the members of the LLC, as well as a timeframe and framework.  In the event of losses, there needs to be a game plan for either member loans or additional capital contributions.  While discussing money matters with other members can be challenging, it needs to be a priority.  Additionally, all members should consult with their individual tax professional or a company tax professional to discuss taxation, which can either be as a partnership or as an S-Corp.  Once operation, it is vital that all members have a written down understanding and agreement of where the money will go, who will get what, and when they will get it. Figuring out what decisions need to be made should be discussed with an attorney prior to starting any sort of company to save anyone from issues between members so that there is a clear understanding from the get-go.

Avoiding Disputes Between Members

Default rules on an LLC directed by the state in which the business resides will take a huge effect on your company if decisions regarding your LLC are not made. There can also be issues with respect to the Company as a whole or individual members.  Most small business, or their individual members, would be hard-pressed from a time and financial commitment to litigate a dispute, especially if their livelihood was based on the revenue of the entity.  Additionally, you can set forth the obligations of each member during the pendency of a dispute.  If multiple members there can also be carve-outs for when the company will defend and indemnify a member or manager, which may be incredibly important depending on the context of the dispute.  Other issues that may occur is when a member no longer wants to be a part of the business or abandons their role, all of which can be preemptively addressed in the operating agreement.

Member and Manager Responsibilities and Overall Governance

As I am sure you have already discussed this with your future business partners, it is still ideal to set forth in writing what members can expect in good times and bad.  This is typically best addressed either conceptually from the outset rather than after the fact.  Anything can happen after a company is formed, life does not stop for anyone so be sure that you have a discussion with one of our experienced business attorneys and a set-out plan of who will be doing what.

We can help you create your LLC

Having legal guidance when creating your LLC may be the best thing you can do for yourself, your family, and your business partners. Our experienced business law attorneys are able to help you from beginning to end when forming your LLC, as well as all that may happen in between. If you are ready to take the next step and start your company give us a call at 775 882 8032 or schedule your consultation online by clicking here.