When you form an LLC, you need to draft articles of organization that comply with the state’s LLC act and then file the articles with the appropriate state office.
Typically, the required articles are broadly worded and likely don’t address members’ rights and responsibilities as you would like them addressed. Furthermore, most state LLC acts provide default rules that can be overridden or altered by agreement of the member(s). Odds are the act doesn’t provide what you want, and even if the default rules are acceptable today, they may be unacceptable tomorrow if the act is revised by the state’s lawmakers.
Relying on the default rules may be an easy way to get your LLC going, but hardly ensures that your business
goals will be met. We suggest that you consider the extra step of having your lawyers create a written operating agreement. This agreement provides operational rules for running the business and can override or alter the default rules in your state’s LLC act to better meet your needs.
With the operating agreement, you:
- increase the LLC’s limited liability protection by making it more difficult to “pierce the veil,” because the operating agreement makes your LLC appear more business-like;
- can prevent the unwanted dissolution of the LLC, which distributes the assets to the members with no LLC shield from creditors’ claims; and
- can create the plans you need in case of death, divorce, or withdrawal.
Without the operating agreement, others may be allowed to:
- welcome new members into the LLC without your consent;
- change which law governs if business crosses state lines;
- incur debt or sell assets without your consent;
- add, remove, or revise the terms of the agreement; or
- dissolve the LLC without your consent.
You can see why you want an operating agreement. The agreement should be drafted simultaneously with the articles of organization and signed as soon as possible by all members. It need not be filed with the state and so is not a public document.
Even Single-Member LLCs Need An Agreement. A written operating agreement supports treatment of your single-member LLC as a separate legal entity. That’s why you created the LLC in the first place: for the legal protection. Your written operating agreement helps ensure that protection. Plus, your death or the transfer of part or all of your interest (think divorce) can result in the addition of members
with no prior involvement in your business. The operating agreement can address those factors and others.
We recommend your operating agreement to be in writing. While you can create an agreement using online fill-in forms, you’re far better off hiring a knowledgeable attorney. Also, you can immediately write off up to $5,000 for federal tax purposes when you incur attorney fees to get your LLC in place with its operating agreement.
If you or your lawyers would like to discuss the operating agreement with us, please don’t hesitate to give us a call.
