Safeguard your business and IP with a trusted legal partner.
Photo of Ronald J. Tong

What is an operating agreement and why does your LLC need one?

On Behalf of | Mar 13, 2023 | Business Litigation

If you’re in the process of setting up a new business, it can feel like there’s endless paperwork requiring your attention, especially when you want to do everything right and make sure you’re doing everything by the book.

If you have chosen to file an LLC, you need to add “create an operating agreement” to your to-do list. This legal resource will help you to clarify, in writing, exactly how the business should be run.

What is an operating agreement?

An operating agreement is a legal document used by business owners to outline how they intend to carry out the internal operations of their new company. It is a legally-binding agreement that is enforceable in court in the event that any members breach their duties to each other or their company.

The document will address a variety of financial and operational issues. For example, multi-member LLCs generally include the percentage of ownership of each member and what should happen in the event that the members opt to close the business down in their operating agreements.

What are the benefits?

While you may have had many conversations between you and your partners about how the business should be run, these mean nothing (legally-speaking) unless you execute a contract to solidify your mutual agreements. An operating agreement makes sure that you have written records of how everyone wants the business to be run and structured. If you have multiple members in the LLC, it forms a binding contract between parties to govern important decisions.

Having an operating agreement in place reduces your personal liability. It helps the law to recognize the business as an LLC as opposed to a partnership or sole proprietorship. In the event that something goes wrong or the business faces legal action, this can resource be essential in avoiding personal financial consequences that might otherwise occur in the wake of an expensive lawsuit.

It’s important to make sure you’ve got everything you need when you set up a new business.  Having the help of a legal professional can help you to make sure you have all the necessary documents in place and that your interests are adequately protected.