LLC Operating Agreement – Do I Need One?

Rocco E. Cozza • April 25, 2019

An LLC, or limited liability company, is an entity formed under state law. An LLC operating agreement is the governing document of that entity. Many compare an operating agreement to the bylaws of a corporation, although they are different in a lot of respects. Now, the laws of each state vary when it comes to LLCs and most don’t require an operating agreement. However, without one, state law governs the entity and in most cases, you don’t want that. For that reason, it is always recommended to have an LLC operating agreement.

LLC Operating Agreement – the benefits

Whether you are a single member or multi-member LLC, there are numerous benefits to having an LLC operating agreement. Here are just a few:

Liability protection: The operating agreement demonstrates that you are treating your LLC as an entity separate from yourself. This is imperative to take advantage of the legal protections an LLC provides. In the event your company is sued, the operating agreement can play a crucial part in the litigation.
Succession Planning : In the event something happens to you (if a single member LLC) or one of your partners in a multi-member LLC, the operating can be used to outline a plan of succession for the business. Absent such agreement, the court will decide what to do, which is something you definitely want to avoid, especially when it comes to the distribution of assets.
Liquidation and Termination : In many instances, businesses fail and partnership flounder. Without an operating agreement, you will have to close up shop and divide the assets in accordance with state law, which can sometimes lead to lengthy litigation if the partners don’t agree. When there is an LLC operating agreement in place, this problem can be avoided.
Indemnification: This is the biggest protection, in my opinion, an operating agreement will provide. Indemnification is when one party pays for the defense and settlement of a claim brought against a third party for something done either by the indemnifying party or on behalf of them. Absent an operating agreement with this provision, you may be in substantial hot water in more ways than one.

LLC Operating Agreement – You Need One

As you can understand, an LLC operating agreement is, in my opinion, a necessity for any limited liability company. This single document can provide so many levels of protection that you should not take the drafting of one lightly. Too many times have I had clients come to me with an operating agreement they found on the internet, signed with their partners, and now are trying to find a way out of it. You don’t want to be this person. The cost of setting one up the right way is a lot less than you think and doing so will give you a peace of mind knowing that you are protected.

So if you are interested in setting up an operating agreement for your LLC, send us a message today. You will find that it is worth the time and investment.

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