An LLC operating agreement is the guts of your company, and yet many people ignore it or never even get one. Many internet sites offer free articles of organization and then charge for the operating agreement, so people just skip it.
After all, if you file the articles of organization, you have a limited liability company (LLC) as far as the state is concerned. Why bother with an LLC operating agreement?
An LLC operating agreement is a document that you get to write and you never file it anywhere, so it must not be very important. This is the logic of many people. But it controls everything that happens in your LLC.
It controls your tax choices, what asset protection your get out of your LLC, what happens to the LLC after you die, what people have to do to get the company assets when you get declare bankruptcy, and so many other aspects of your business.
Yes, you get to write your LLC operating agreement. You have a great opportunity. However, the three or four pages you get off the internet aren’t going to come close to addressing the issues you need to cover in your operating agreement.
LLC Operating Agreement Basics.
Your LLC operating agreement should be somewhere between 20 and 30 pages long. It needs to address the tax structure of the LLC. It should address the relationship of the members to each other. If you are the only member, this becomes less important, but it needs to be there to satisfy the courts that you have a real company and not just an alter ego.
The LLC operating agreement will define what the members do and what the managers do. Use it as a checklist to determine what the responsibilities of the members and managers are. For example, who has to approve debt incurred by the company? Who approves leases and contracts entered into by the LLC.
If the LLC operating agreement says that the members have to approve these things, then you need to keep a minutes record, and each time the LLC enters into a contract or authorizes a note for debt there needs to be a minute entry in the minutes of the LLC. The members then need to periodically approve the actions and minutes.
If you just ignore the requirements of the LLC operating agreement, when you get sued the argument will be, “This isn’t a real company. It’s just your alter ego.” Unless you can show the judge that it is a real company, you will lose your “corporate shield.”
The opposing counsel will always ask for the LLC operating agreement, and he will read it very carefully. If you haven’t followed the things in the LLC operating agreement, he’s basically got you, and the company won’t protect you the way you thought it would.
If you don’t have an LLC operating agreement, you lose by default. If you haven’t written the rules, you get the state’s default rules, and they are not written to protect you. The state really doesn’t have any interest in protecting you from your mistakes and creditors.
Can you see how important the LLC operating agreement is as part of your business structure? You can study a good LLC operating agreement template and learn how to use it HERE.
In my complete LLC Operating Agreement Course with customizable forms, there is almost two hours of audio instruction that covers each part of the LLC operating agreement and walks you through step by step how to establish your operating agreement and then how to use it.