What is an Operating Agreement and Why Does Every LLC Need One?

The operating agreement is one of the most important documents for a limited liability company. With this article, I will briefly outline what it does, why you need it, and what financial risks you may face personally if you operate without one.

What is an operating agreement?

Think of an operating agreement as the Constitution for your company. It clearly outlines the leadership and management structure of the company, determines how decisions are made and profits are shared, and, most importantly, shields your limited liability status.

Operating agreements are not only important for the inner workings of your business; it also has important purposes outside of your business as well. Companies that have an operating agreement in place have a greater appearance of legitimacy. Many banks require business owners to present an operating agreement before a bank account can be opened. Similarly, lenders and other financial institutions look for an operating agreement to prove that you are a legitimate business. It shows that you are serious about creating an organized, future-focused company.

Do I Need an Operating Agreement if I am the Only Owner and I Don't Have any Employees?

Yes. An operating agreement is important for single-member LLCs as well because it adds another layer of protection. When choosing your business structure, one of the biggest selling points for the LLC over other structures, like the sole proprietorship, is the fact that it provides limited liability. This means that the owner is less likely to be found personally liable for the debts of the company. If you get sued or owe a significant amount of money the limitation of liability provides a crucial layer of protection.

However, this protection is not absolute. There are certain circumstances where the court can decide not to honor your limited liability protection. With single-member LLCs, this can occur when the court determines that for all intents and purposes, you are essentially operating as a sole proprietor. The creation of an operating agreement helps to protect you from this occurring because it shows the court that you intend to operate a limited liability company. Of course, it is important to note, that there is no legal structure or document that can grant absolute protection from personal liability, and the operating agreement is no different. However, it helps to show the court your intent and makes it less likely that you will be found personally liable.

How do I get an operating agreement?

An operating agreement is essentially a contract within your company. It's important that, like with any contract, you work with an experienced business lawyer to draft this agreement and have it customized for your specific legal needs. If you try to build it yourself from a template, it may not address the unique needs of your business.

If you have any questions, please feel free to contact our office by calling 614.434.8015 or emailing me directly at [email protected].