Why You Need an LLC Operating Agreement
Brad Smith • October 25, 2019
Choosing to form an limited liability company among the many types of business structures
can be a great decision.
In your research, you may have seen conflicting reports about whether you should file an operating agreement for your LLC. Yes, it’s true that not all states require this document—Missouri requires one while Illinois does not. Regardless of which state you operate in, we recommend that you need an LLC operating agreement.
Here’s why.
An operating agreement is “outlines the business' financial and functional decisions including rules, regulations and provisions,” according to the Small Business Administration. Its purpose “is to govern the internal operations of the business in a way that suits the specific needs of the business owners.”
When members (owners) sign the operating agreement, the document acts as an official binding contract.
The three primary benefits of LLC operating agreements, according to the SBA, are:
- Protecting the business’ limited liability status
- Clarifying verbal agreements
- Protecting your agreement in the eyes of the states
Operating agreements help define how key business decisions are made. They include terms for many of the business’ operations, such as:
- Whether the company is managed by members or managers
- The classes or groups of members and their rights, benefits, and responsibilities
- Voting structure for company decisions, including percentage of members’ ownership
- Allocation of income and losses among the members
- How and when to hold meetings
- Tax elections for the company
- Restrictions on transfer of membership interests
- Buyout and rules for succession planning in the event a member leaves or dies
As mentioned, the state of Missouri
requires the drafting of an operating agreement for an LLC. However, companies do not file with agreement with the secretary of state or any other government agency. Please verify whether your state requires filing your operating agreement with a government arm.
Whether you file your operating agreement or not, the SBA recommends keeping your document with your business’ core files and to keep it confidential.
You can draft an operating agreement yourself. However, if you require legal counsel, we would be happy to help draft an operating agreement that meets your needs. Please don’t hesitate to contact us to get started.
More Resources On LLC Operating Agreements
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