An operating agreement is a document that describes how single or multiple members of a limited liability company will direct and manage a business. The operating agreement protects the business’ limited liability status by preventing a court from “piercing the corporate veil” or looking past the limited liability category, and holding its members personally liable for business debts. Also, the operating agreement indicates to others that your business is legitimate, and it contains a legal document that most companies have. Additionally, the document may come in handy when a business owner wants to obtain financing from a lender or buys land. An investor might request to see an operating agreement before he agrees to put money into a business. Both accountants and lawyers may want to review the document for accounting and legal purposes as well.
Many business owners draft their operating agreements soon after they file the certificate of formation to start their companies. However, some business owners put off getting an operating agreement, and tell themselves that they will get one later, and that day never comes.
Although a business owner can obtain an operating agreement at any time, the worst time to get one is when there is a problem. Issues can arise when a single member limited liability company is sued, and the opposing party’s attorney argues that the business is illegitimate, and its assets can be seized. If the business presents an operating agreement to the court, it may find that the company is legitimate, and protected by its limited liability status.
In the case of a multi member limited liability company, an operating agreement can help minimize disputes. They usually give detailed explanations of how the members or manager should run the company so that there are no misunderstandings on who does what and how. When there are disagreements, the operating agreement should explain how the members or managers handle them.
There are many topics covered in an operating agreement, such as, general information about the members, ownership rights, taxation issues, voting and dissolution matters. This is not an exhaustive list, these are just some of the issues contained in the legal document. If you don’t have an operating agreement, then you really need one. Please contact me if you would like me to draft yours.
