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Why Is It Important to Have an Operating Agreement for an LLC?

operating agreement

Many small business owners opt to have a limited liability company (LLC) business structure. This provides the owner, or multiple owners known as “members”, with more personal protection but less formality than other business entities. Those who decide to follow an LLC structure should have an operating agreement in place to ensure that all members are on the same page and the business’s functional and financial dealings are explicitly outlined. Operating agreements are not required for LLCs; however, they offer a number of benefits and are always a good idea when starting your business. For help with the legal side of your operating agreement, work with a reputable business attorney who can guide you through the legal document’s details.

What Is an Operating Agreement?

For LLCs that have multiple members in charge of the company’s dealings, an operating agreement is a good way to maintain continuity between the owners and management. An operating agreement is a legal document that describes the operations of an LLC and includes agreements between the business’s various owners. The document acts as a rules and regulations manual and partnership agreement to meet the specific needs of all of the members. Once the document is formulated with an attorney and signed by all of the LLC’s members, it is legally binding in the same manner as a business contract.

What Benefits Do They Offer?

Since every operating agreement is tailored to meet the needs of your LLC, there are several benefits that they can offer your business, including the following:

    1. Decreasing Your Chances of Conflict Between Business Partners: We have many clients approach us with business disputes that could have been avoided if they had a properly drafted operating agreement. By creating an operating agreement, the LLCs members can discuss commonly occurring disputes, such as buy-out terms or decision-making processes, and put in rules to ensure that the members agree on how to handle these scenarios.

    1. Avoiding Reliance on Verbal Agreements: It is not uncommon for business partners to make verbal agreements without putting them into writing, especially if the members are family members or close friends. Operating agreements allow you to put these oral agreements into writing to avoid future disagreements or confusion on the terms of your business.

    1. Running the Business On Your Own Terms: If you do not have a valid, legal operating agreement, state default laws will govern your business. These are often general rules that do not contemplate many scenarios, so it is not advisable to rely on these laws to determine the policies of your business.

    1. Business Succession: You may also include information regarding what will happen with your business in the instance of your death or inability to run the business. This is also known as a succession plan. Succession plans can be incorporated into your operating agreement to ensure that all members are aware of what will happen if any of you lose your ability to handle managing a business.

  1. Looking Toward the Future: You may be surprised by the number of business details that should be written out rather than assumed, including how things will be handled in the future. If you and the other members are considering bringing a new member into your business, you should have a voting structure outlined and set in place to make the decision as a team, rather than particular voices having more sway in the decision. You may also include the business procedure for members who wish to resign.

Contact an Elmhurst Business Lawyer

Whether you are just starting your business, adjusting your business structure, or would like to change the details of your operating agreement, professional legal counsel should be present throughout the process. At Shakfeh Law LLC, our experienced business law attorney has been assisting Illinois residents with their business dealings for nearly a decade. She understands the inner workings of small business ownership as a member of an LLC herself. For help creating or updating your operating agreement, contact our skilled Oak Brook business attorney at 630-517-5529 today.

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