Why Every LLC Needs an Operating Agreement

In my blog post last week, Five Steps to Forming an LLC in Oklahoma, I mentioned that every LLC needs an Operating Agreement.  It is essential to success of your small business that your LLC has an Operating Agreement.  Oklahoma law does not require your LLC to have an Operating Agreement, and further, if you're a single-member LLC, why is having an Operating Agreement so vital?  

Here are three reasons why every LLC needs an Operating Agreement:

1.   The first reason why it is vital to have an Operating Agreement, is because this document will allow you to customize your business structure.  A key provision of an Operating Agreement is whether or not your LLC is member-managed or manager-managed.  The default option is typically a member-managed LLC, but you can elect to have your LLC managed by a manager, who is not a “member” (or owner) of the LLC.  This practice is common with multi-member LLCs.  Also, if you have a multi-member LLC, your Operating Agreement should describe the roles and responsibilities of the members of the LLC (the owners) and explain the process of making decisions in an event the members of the LLC disagree.  Further, the LLC should have a buy-sell provision, which explains how the LLC will handle the situation of a member of the LLC departs the LLC.  This provision is similar to a pre-nuptial agreement prepared before a couple gets married.

2.   The second reason why every LLC needs an Operating Agreement is because you should avoid Oklahoma's default rules for LLCs.  Oklahoma LLCs are governed by the Oklahoma Limited Liability Company Act.  The Act is not necessary a bad statute, as it provides you the ability to form your LLC.  However, if your LLC does not have an Operating Agreement, the rules for governing your LLC default to the Act… which says very little about running your business and gives very little guidance which you need an Operating Agreement to provide instead.

3.   The third reason why it is essential for your LLC to have an Operating Agreement is that the document will help protect your limited liability as a member of the LLC.  Especially if you have formed a single-member LLC, the Operating Agreement will show that the LLC is a separate entity from you as an individual business owner.  If you do not have an Operating Agreement as a business “formality,” then you may expose yourself as an individual to liability, even after forming the LLC to protect yourself from liability.

Now that I've shared three reasons why I every LLC needs an Operating Agreement, here are seven key provisions every Operating Agreement should have:

1.   Business name, principal place of business address, and registered service agent.

2.   Whether the LLC is member-managed or manager managed; describe the duties and responsibilities of members and managers, and if multi-member, provide a buy-sell provision in the event one of the members leaves the LLC.

3.   Taxation: You can either allow the member(s) of the LLC to elect pass-through or S-corp status at a later point in time or make that decision now.  Before you make this decision, you should consult an attorney and/or tax professional.

4.   Distributions: You can have a specific schedule of when the members of the LLC can have distributions of income from the LLC; or if they can take a distribution at will (whenever they would like).

5.   Whether actions taken by members of the LLC must be consented to in writing.

6.    Dissolution provisions

7.    How to amend the Operating Agreement in writing, e.g. if the member(s) wish to add a member to the LLC.

Lastly, there are online resources available to help you draft an Operating Agreement, but as always, it is best to consult an attorney to help you draft one.  For a single-member LLC, most attorneys will charge a reasonable flat fee (my fees start at $500 for single-member LLC business startup packages).

If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected].  For more information about Liberty Legal Solutions, LLC, please visit our website http://www.libertylegalok.com.