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What is an Operating Agreement and Why Does Your LLC Need It?

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What is an operating agreement?

An operating agreement is the governing document of a Limited Liability Company (LLC). This document dictates the obligations and rights of the owners of the LLC, which are called members. An operating agreement also determines the distribution of profit and losses of the company.
The terms included in an operating agreement are the day-to-day activities and the procedures to be followed when:

  • The members of an LLC need to make a decision for the company.
  • A new member wants to join the LLC.
  • A member becomes disabled or dies.
  • A member would like to exit the company.
  • There is a business dispute between the members.
  • The LLC faces a lawsuit.

A well-written operating agreement clearly determines the responsibilities of owners and adds specific provisions to prevent potential risks, such as disputes and lawsuits.

Can I make my own operating agreement?

An operating agreement does not need to be drafted by a lawyer to be binding. Using a template from the internet is completely legal for this purpose. However, it is highly recommended that a business attorney intervenes in the process because there are several points that only an experienced lawyer can foresee.
These are reasons why you should not make the operating agreement on your own:

1. Increased potential for conflict and business dispute

The main cause of disputes is misunderstandings. When you do not add the proper terms in your contract, members have an unclear idea of their rights and obligations toward the LLC.
An experienced lawyer knows exactly what to include and the aspects of a business are more likely to cause disputes. This way, the attorney will create provisions regarding the buy-out terms or other procedures designed to avoid conflict and ensure all the members of the LLC are on the same page.

2. Templates do not adapt to your needs

Templates only cover the basic information of an LLC and are not tailored to your business model or industry. A lawyer is capable of drafting an operating agreement specific to your business objectives, the members of your LLC, the liabilities you may encounter, and more. Also, it is very common that people use the wrong kind of template for their needs or that the one that they\’re using is outdated and does not use the proper language.

3. You are not able to exploit the full potential of your LLC

Operating Agreements are often seen as mere requirements for an LLC, but they are also a great tool that allows these companies to be managed in different ways. One of the greatest advantages of LLCs is their flexibility, which cannot be used at its fullest with a poorly written operating agreement. A contract attorney is capable of being creative and adding provisions that will not only protect your company but boost its full potential.
An Operating Agreement, more than a contract, is a strategy. Using it properly can be a game changer for your business, as it will be protected and apt for growth.
Meta Title: What is an operating agreement and why does your LLC need it?
Meta description: An operating agreement is the governing document of an LLC. Learn why is it so important and the dangers of creating one on your own.

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