This week in the Freedom Friday blog and email newsletter, we're continuing the series 10 Steps to Take Your Small Business to the Next Level in 2023, and this week we're covering the third step to take your small business to the next level, which is to review your business documents. If you formed your small business as an LLC, you need to review your operating agreement, and if you formed a corporation (either a for-profit corporation or a nonprofit corporation), you need to review your bylaws. Now, you might also realize that you formed an LLC, and you don't have an operating agreement, or you formed a corporation and don't have bylaws. If that's the case, then your next step would actually be to create an operating agreement or bylaws, and I would encourage you to consult with an attorney to get this done right away.
You might also ask why you need to have an operating agreement or bylaws. Every LLC needs an operating agreement, even if it's a single-member LLC, and every corporation (for-profit or nonprofit), needs bylaws. These documents are very vital and important to the success of your small business. If you have had any changes in your business, it's important to review your documents and update them if necessary. While there are online resources available to help you draft your operating agreement or bylaws, it's always best to consult with an attorney to help you draft your operating agreement or bylaws.
Most small businesses choose to form an LLC, and so I'm going to focus on the operating agreement in the rest of this article. There are lots of similarities between an operating agreement and bylaws for a corporation. But first, especially if you don't have an operating agreement, why is this important? Oklahoma law does not require you to have an operating agreement for your LLC, but even if you're a single-member LLC, there are three (3) reasons why every LLC needs an operating agreement.
The first reason why every LLC needs an operating agreement is because this document allows you to customize your business structure. A key provision of your operating agreement is whether your LLC is member-managed or manager-managed. The default option is member-managed, but you can choose to have your LLC managed by a “manager” who may or may not be a member of the LLC. Also, if you have a multi-member LLC, your operating agreement should describe the roles and responsibilities of the LLC members (or owners) and explain the decision-making process, especially if the LLC members disagree. Further, the LLC operating agreement should have a buy-sell provision which explains what happens if an LLC member leaves the LLC for a variety of reasons, or if that member should die or become incapacitated. This provision is similar to a pre-nuptial agreement prepared for a couple getting ready to marry.
The second reason why every LLC needs an operating agreement is because it helps avoid the default rules for LLCs. In Oklahoma, LLCs are governed by the Oklahoma Limited Liability Company Act. The Act is not necessarily a bad statute, as you could not form an LLC without it. However, if your LLC doesn't have an operating agreement, then the rules for governing your LLC default to the Act, and the Act says very little about running your business, and further doesn't provide the guidance that you need to be given from your operating agreement.
The third reason why every LLC needs an operating agreement is that it will help give you limited liability as a member of your LLC. Especially if you formed a single-member LLC, the operating agreement will demonstrate that the LLC is a separate entity from you as an individual. If you don't have the operating agreement as a business “formality,” you might expose yourself personally to liability, even after forming the LLC.
So, that's why it's important to have an operating agreement for your LLC, or bylaws for your corporation. If there are any changes in your business, its essential to have an attorney review or make the changes to these important business documents.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/