Does Your Business Need An Operating Agreement? Yes, And Here’s Why
In life, it can be easy to skip over the details. The same can be said for business. If you run or own an LLC, it may be easy to want to skip over the formality of having a written operating agreement. But for a number of reasons, that could be a very big mistake.
Your LLC does not legally need to have an operating agreement. But without one, you could run into some serious problems down the road.
First, having an LLC shields you from personal liability should the business be sued. But what if the business is sued, and then there’s a dispute over whether the business is, in fact, an LLC? Your personal assets could all be on the line, simply because you didn’t formalize the fact that you were an LLC through having an operating agreement.
Ownership and Profits
You can have a single member LLC, but in many cases, there are multiple owners. Each may have different responsibilities, or have the right to do certain things, or have the right to share in the company profits by different percentages.
The last thing your business needs is a lawsuit between its members or between a member and the LLC. A written operating agreement can spell out exactly what is expected of each member, and what each member can expect to receive from their participating in the LLC.
Similarly, different members may have different responsibility to incur corporate losses, and different rights to share in corporate profits. It’s always best to have an operating agreement that spells these rights out clearly among the company members.
Voting in an LLC can be percentage based, or can simply be one vote for each member. If you choose to have one vote per member, it’s best to put that in writing, so that someone with a larger ownership share knows going in that they will have one and only one vote.
When it comes to voting, there are other questions to be resolved. Will there be proxy voting? Can you vote online or remotely? What is a quorum for the purposes of having a valid vote? What if there aren’t enough votes to take action at a meeting because of some emergency, like a hurricane? These are all things commonly addressed in an operating agreement.
What happens when a member gets divorced, or files for bankruptcy, or passes away—all situations where that member’s ownership in the LLC can be passed on to someone else that you may not want to be a new member of the business. Your operating agreement can give your company the right to buy back ownership, so you’re not forced to do business with someone you don’t want to do business with.
Call the West Palm Beach commercial litigation lawyers at Pike & Lustig for help today drafting your corporate documents.