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Updated: Sep 11, 2021

What is an Operating Agreement?

An operating agreement establishes foundational rules for your LLC and its members. The rules relate to the organizational structure, management, procedures, duties and rights. Creating an operating agreement will benefit you and your LLC for reasons stated below.

llc, operating agreement, forming a business, business entity, Brinkley law
Top Five Reasons Your LLC Needs an Operating Agreement

Here are 5 reasons your LLC needs an Operating Agreement:

  1. An Operating Agreement establishes rules most favorable to your LLC. In the absence of an operating agreement, your LLC will be subject to the default rules of your state. The default rules are generic, and some of them might even be unfavorable to your business. By creating an operating agreement, you can establish your own rules that are specifically tailored for your LLC.

  2. An Operating Agreement provides for death and incompetency. An operating agreement may include information that specifies what happens in the event that you die or become unable to run your business. Without this clause, your business could get caught up in costly litigation or even result in your minor child being responsible for running and managing your business.

  3. An Operating Agreement strengthens your liability shield. An LLC offers personal liability protection, but not unconditionally. For example, if you do not treat your LLC as a separate business entity, you might lose your personal liability protection. An operating agreement lays out and emphasizes specific rules that members must follow; therefore, it can help you better strengthen and maintain your personal liability protection.

  4. An Operating Agreement maintains stability. An operating agreement addresses how the LLC will be managed and establishes a clear chain of command. An operating agreement also determines how decisions will be made. These rules can promote and maintain the stability of your LLC, especially in times of difficulty or change.

  5. An Operating Agreement adds credibility to your LLC. An operating agreement makes your LLC appear more official. In a lawsuit to hold you personally liable for the debt of your LLC, the Court will consider whether an operating agreement exist. The failure to have an operating agreement may be used against you. Most lenders will also require an operating agreement before lending money to your LLC.

The benefits of an operating agreement greatly outweigh the time and costs needed to develop an operating agreement for your LLC. For help drafting your operating agreement, call us at 317-643-1813 or book an appointment online 24/7.

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