What is an operating agreement?
An operating is a contract that sets out all the operating terms of an LLC. It dictates what happens in the event of a dispute between members, who runs the business and how, what compensation is to be received by the members and also how membership interests are transferred. An operating agreement is similar to the bylaws that assist in running a corporation or the partnership agreement which helps run partnerships.
But why do I need one?
Well if your LLC has multiple members, an operating agreement will detail what happens between the members, especially during a crisis. It is basically an operating manual for your business. It talks about membership interests and voting rights.
A single member LLC doesn’t have to worry about voting rights, membership interests or disputes, but a single member LLC still needs an operating agreement.
One of the advantages you enjoy as an LLC is limited liability. Limited Liability occurs when an LLC is treated like a separate entity from the business owner. In proving separate identity, a multi-member LLC normally shows a separate banking account or that control is handled by multiple people. Establishing separate identity is a little harder in a single member LLC because there is only one owner, but this is why it is important to have all of your paperwork in check to show that you did indeed operate as a separate entity.
An operating agreement is one of the first documents that show that you intended to operate as a separate entity. By keeping proper records of business documents, a single member LLC can help protect its limited liability status and thus prevent a piercing of the veil situation (lifting of a LLC or Corporation’s limited liability.
In addition to upkeeping separate entity status, an operating agreement also dictates an order of succession, setting up what happens if the single member owner dies or is unable to run their business, thus avoiding any disputes of who gets the business after the owner dies.
Lastly, having an operating agreement helps you avoid the default rules of your state. If you have no operating agreement, whatever your state rules are rules.
Make sure that you have everything in order to show your LLC is a separate entity! Contact The Startup Pro today if you need any assistance with your LLC.