If you own an LLC, you might have asked yourself "do I need an operating agreement?"
My answer to my clients is a very solid "probably."
An operating agreement does the same thing for an LLC that bylaws do for a corporation: it discusses, documents, and memorializes the relationship among the members of the LLC and indicates in writing how the profits and losses of the LLC will be distributed. It also lays out whether interests can be transferred and what happens upon the death, incapacity, disability, divorce, or bankruptcy of one of the members.
If your LLC is a sole-member LLC (one that has only one owner), most of the time you do not need an operating agreement. There is one caveat to that, which I am seeing more and more of: banks that require an operating agreement for an LLC to open an account. Banks are getting stricter about who can open accounts; there are way too many sham entities that are opening bank accounts all across the country, and so you may find that your bank is going to require an operating agreement. Additionally, if you are looking to bid on a government contract, the government entity may ask you to provide a copy of your operating agreement because it helps legitimize the business.
If your LLC is a multimember LLC (one having two or more owners), I almost always say, “yes you need an operating agreement,” even if the two members are husband and wife. In most states, the rules governing the operations of an LLC are very bare; owners generally form LLCs because they want a more flexible entity. But along with that flexibility comes the lack of regulation, or said another way, along with the lack of regulation comes flexibility.
But many times, the flexibility and lack of governing regulations or operating agreement can result in problems. For example, what happens when one member wants out of the LLC? Can that member just withdraw? What happens if one of you becomes incapacitated or one of you dies? What happens if you are at an impasse with regard to a major business decision? If you are 50/50 owners, what happens if one person wants to bring another person in or sell part of their interests? All of this should be set forth in an operating agreement to reduce the chances that a dispute will end up in court or that your relationship with your LLC members will quickly devolve into argument and impasse.
In sum, if your LLC is a multimember LLC, you should have an operating agreement. If your LLC is a sole-member LLC, it is not necessary unless required by a third party such as a bank or government entity.
We can draft an operating agreement that will put the important aspects of the LLC member relationship in writing. Give me a call or email me at [email protected].
KATHERINE L. TAYLOR, ATTORNEY AND CPA
5850 Waterloo Rd