What is an Operating Agreement?
An Operating Agreement is a contract between the members of an LLC which serves as the LLC’s governing document. The Operating Agreement outlines voting and ownership percentages, delegates authority to specific managers or members, and determines how distributions of profits and losses, and transfers of interest may occur, among other things. An Operating Agreement is a contract and LLC members should abide by the Operating Agreement throughout the operation of the business.
Why does your LLC need an Operating Agreement?
Operating Agreements are vital instruments to protect the personal assets of LLC members. Without an Operating Agreement, it may be difficult to differentiate between you in your personal capacity and your LLC as a business entity. This leaves your personal assets vulnerable to potential creditors who may try to “pierce the corporate veil” and reach your personal assets in a lawsuit against your LLC. The Operating Agreement, as the governing document of your LLC, shows that LLC members operate according to a specific set of rules as opposed to making decisions on a whim. For the Operating Agreement to be the most effective, your LLC should follow its provisions as closely as possible.
Should you use a free online template for your Operating Agreement?
Free online templates may seem like a great way to save money when starting your business, but they may end up costing you later. The purpose of the Operating Agreement is to outline the agreement of the LLC members and protect members’ personal assets. Free online templates are rarely tailored to the specific needs of your particular LLC and may not be in the proper form as required by your state. If your Operating Agreement lacks the necessary legal language required in your state to protect your assets, the document is essentially useless, and your personal assets will be vulnerable to potential creditors.
It is always a good idea to have an attorney draft or review your Operating Agreement in order to ensure that your personal and professional interests are protected.