Hi there. I'm Katherine Taylor, the lawyer for business owners. I'm going to be doing a series of videos on operating agreements. In this first video, I'll explain what an operating agreement is and why your company needs one. In future videos, I'll hone in on the various parts of an operating agreement and explain them in more detail. I'll also share examples of real-life disputes I've seen with my own clients that could have been avoided with a well-drafted operating agreement.

So first, what is an operating agreement? It is an agreement among the members of an LLC. The members of an LLC are its owners. An operating agreement is a contract among and between those members that sets forth how the LLC will be managed and operated, how profits and losses will be distributed, and what happens if the company needs to be dissolved. Essentially, it serves as the constitution or bylaws for an LLC.

When you compare an LLC to a corporation, it becomes even more evident why an operating agreement is so important. Corporations are governed by state statutes that provide detailed rules about management, governance, and the rights and responsibilities of shareholders. LLCs, however, typically do not have that same level of statutory guidance. Because of this, LLC owners must create their own rules. Those rules are set out in the operating agreement. While you shouldn't draft one on your own—you should have a lawyer prepare it—your LLC must have an operating agreement in place.

So why is an operating agreement important? First and foremost, it helps demonstrate that the company is a separate legal entity from the individuals who own it. This distinction is critical to maintaining the liability protection between the LLC and its owners. Second, an operating agreement allows you to avoid default state rules and create your own. This is important because every business is different, and every group of owners has different goals and expectations. Those expectations need to be clearly outlined in writing to be enforceable as a contract among the members.

An operating agreement can also include provisions that help prevent conflict and provide clarity. For example, it can specify who makes which decisions, what happens if the business needs additional capital, and how disagreements will be resolved. It can also address what happens if a member dies, wants to exit the business, gets divorced, becomes incapacitated, or files for bankruptcy. Planning for these situations in advance can save significant time, money, and stress later on. Finally, if you're seeking financing or even just opening a bank account, many banks will require a copy of your operating agreement.

In future videos, I'll dive deeper into the specific parts of an operating agreement and explain how certain disputes could have been avoided if a properly drafted operating agreement had been in place.

If you have an LLC and don't have an operating agreement—or if you're not sure whether your current agreement truly protects you—I encourage you to reach out. Contact me to schedule a consultation so we can review your business structure and make sure your operating agreement is working for you, not against you. I'm here to help you protect what you've built.