The Benefits of An Operating Agreement
This article discusses the importance of an operating agreement in connection with an LLC business structure.
The LLC is one of the most popular business structures today, and for good reason. With an LLC, your personal assets are protected from legal liabilities and debts. On the financial side, there are tax benefits, and the flexibility to share profits. Its reporting provisions are less onerous that S- or C- corporations, so administrative overhead and paperwork is simpler. Partners and key personnel can assign specific areas of responsibility.
So, what’s not to like?
Well, if you’re running an LLC without an operating agreement, you leave yourself vulnerable to numerous issues and disputes that could derail your best intentions. So, if you don’t have an operating agreement, get one. It could save you from a lot of headaches.
Compelling Reasons For An Operating Agreement
From an operational and financial perspective, an operating agreement gives your LLC a very strong governance that specifically articulates your unique business situation. Better still, it allows you to set the terms instead of the default laws set by the state of Pennsylvania. And, while Pennsylvania does not require an LLC to have an operating agreement, you are wise to have one anyway.
More specific reasons include: it adds greater emphasis to ensure your personal liability is protected. Though an LLC allows for the separation of personal and business asset liabilities, an operating agreement formalizes it.
Even with the best intentions, no business team is without conflict. The potential for misunderstandings, shifting alliances and commitments among key players can lead to acrimony, or worse, litigation. An operating agreement can stipulate how disputes and legal challenges are to be handled. So, for instance, mediation instead of litigation could be included.
On an operational level, it can define the decision-making process, profit-sharing, and the way key players are hired or when they leave.
Be aware that in some states the default LLC provisions require owners to equally divide profits and losses regardless of how much each owner invested. An operating agreement can set forth how profit and loss is shared in a manner that reflects an individual’s equity stake.
Key Topics to Include in An Operating Agreement
- Meetings and voting rules
- Profit and loss allocation
- Rights and responsibilities
- Who has what percentage interest in the LLC
- Voting powers
- Buyout provisions
- How and who manages the LLC
Every LLC and operating agreement should be carefully crafted to address the unique qualities of the business, its particular owners, and its mission. Please contact me if you have questions in this incredibly important area. I’ll help you set-up a very strong structure so that you can focus on running your business rather than getting bogged down in disputes. I look forward to hearing from you.