An Operating Agreement is an agreement among LLC Members that governs the LLC’s business as well as member’s financial and managerial rights and duties.
Many states require an LLC to have an Operating Agreement, however Ohio is not one of those states. LLCs that operate without an Operating Agreement are governed by the state’s default rules contained in the relevant statute and developed through state court decisions. Because an operating agreement will help you guard your limited liability status, head off financial and management misunderstandings, and make sure your business is governed by your own rules rather than your state’s default rules, it is foolish to operate your LLC without one. Operating Agreements serve three main purposes.
First, Operating Agreements serve to protect your limited liability status. In single member LLCs, an operating agreement is a declaration of the structure that the member has chosen for the company and sometimes used to prove in court that the LLC structure is separate from that of the individual owner. The Operating Agreement is necessary so that the owner has documentation to prove that he or she is separate from the entity itself.
Second, Operating Agreements are also used to override default rules imposed by a state’s LLC Act. In order to do so, an Operating Agreement generally addresses the following things: the members’ percentage interests in the LLC, rights and responsibilities, and voting powers, how profits and losses will be allocated, how the LLC will be managed, rules for holding meetings and voting, and provisions which determine what happens when a member wants to sell his or her interest, dies, or becomes disabled.
Third, Operating Agreements also serve to define the financial and management structure. It is essential for co-owned LLCs to document their profit-sharing and decision-making protocols as well as their procedures for handling both the additions of and departure of members. Without an Operating Agreement, you and your co-owners will not be sufficiently equipped to settle financial and managerial misunderstandings.
Further, The Operating Agreement defines each member’s rights, powers, and entitlements, including capital accounts, membership interest, distributions of profit and allocated tax responsibility. This internal agreement, which is set by the company members, contains provisions for critical rules and provisions relating to how the company is run.
Even if your state doesn’t require an Operating Agreement, it would be foolish to leave yourself and your LLC inadequately protected. So if you live in Ohio and have an LLC, it is wise to protect yourself and your business with an Operating Agreement.
Crumpton Law LLC is a Columbus Small Business Law Firm, with attorney Matthew Crumpton serving as managing member and lead counsel.
Tags: limited liability company, LLC, operating agreement, small business