An operating agreement is a contract entered into by the members of a limited liability company, and within the agreement, various terms are defined and described, such as:
- The name and purpose of the company
- The duration of the company
- The management of the company – manager managed or member-managed
- The maintenance of books and records and the execution of the company’s financial affairs
- The members’ voting rights
- The registered agent for the company
- The distribution of profits and losses
- The indemnification of members and the limitation on members’ liabilities
- The options when members seek to withdraw from, or new members join, the company
- The termination, liquidation, and dissolution of the company
- The dispute-resolution process for members to employ, if necessary
Oftentimes, our clients will form a limited liability company through the State by filing the Articles of Organization, but not prepare an operating agreement. However, these Articles do not identify who the members of the LLC are – the operating agreement does.
“But, wait – what if I am the only member of the LLC and I don’t have any plans on bringing on other members? Why should I create an operating agreement when I am the one running the company and will know what to do in the context of 1 through 11?” This is even more the reason to make sure you have an operating agreement in place. Why? One word – protection!
Often, the allure of the protections bestowed by and through limited liability is the factor upon which single-member LLC’s are created. The member wants to enjoy the protections of the company in terms of limited liability and keep their personal assets far away from the LLC’s (and its creditors, if any) reach. However, if an operating agreement is not created, careful scrutiny of the day-to-day activities of the business and the financial activity could create a presumption that the member is acting more akin to that of a sole proprietor, upon the finding of an indicia of commingling between personal and business, and could create a situation where a Court could “pierce the corporate veil” to attach the member’s personal assets where liability is found.
In our humble opinion, it is imperative that the operating agreement is prepared by an attorney. While there are plenty of resources online to create simple versions of these agreements, able counsel will provide specific guidance and considerations based on their knowledge and experience in preparing or reviewing operating agreements. Here at Catina & Mara, PLLC, in our role as general counsel to many small- and medium-sized business, we are routinely called upon to draft, amend, and interpret operating agreements for our clients. It is important to have a legal practitioner prepare these agreements and consider the nuances of your business to ultimately protect you and the relationships among the LLC’s members.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.
