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. Today we're going to cover the third step in taking your small business to the next level, and that is to review your business documents. If you formed your small business as an LLC, your business document is an operating agreement; and if you formed as a corporation (either a for-profit corporation or a nonprofit corporation), your business document is your bylaws. Now, you might be saying, “I have an LLC but don't have an operating agreement,” or “I incorporated but we don't have a set of bylaws.” If that's the case, your next step is to actually 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 be asking why do you need to have an operating agreement or corporate bylaws. Every LLC needs an operating agreement, and every corporation (for-profit or nonprofit) needs corporate bylaws. These documents are very important and vital to the success of your small business. If you have had changes in your small business, its important to review these documents and update them if necessary. While there are online resources to help you draft these on your own, its 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, here. There are lots of similarities between an operating agreement and bylaws that I can point out along the way. But first, especially if you don't have an operating agreement for your LLC, why is this important? Oklahoma law doesn't require you have an operating agreement, but especially if you're a single-member LLC, why is this important? There are three reasons why every LLC needs an operating agreement.
First, its vital to have an operating agreement for your LLC because this document will allow you to customize your business structure. A key provision of an 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 is not a member (or owner) of the LLC. Also, if you have a multi-member LLC, your operating agreement needs to describe the roles and responsibilities of the members of the LLC (or owners) and explain the process of making decisions, especially when the members of the LLC disagree. Further, the LLC should have a buy-sell provision, which explains how the LLC will handle a situation if a member leaves the LLC. This provision is similar to a pre-nuptial agreement prepared before a couple gets married.
Second, every LLC needs an operating agreement 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 it gives you the opportunity to form your LLC. However, if your LLC does not have an operating agreement, the rules for governing your LLC default to the Act, and the Act says very little about running your business and doesn't provide you guidance which you need an operating agreement to give you.
Third, its essential for your LLC to have an operating agreement because it will help give you limited liability as a member of your LLC. Especially if you formed a single-member LLC, the operating agreement would demonstrate that the LLC is a separate entity from you as an individual business owner. If you don't have an operating agreement as a business “formality,” you might expose yourself as an individual business owner to liability, even after forming the LLC.
So, that's why its important to have an operating agreement for your LLC, or bylaws for your corporation. If there are changes in your business, its essential to have an attorney review and or make changes to these important business documents.
If you are interested in starting a small business anywhere in Oklahoma, or you are interested in taking your small business to the next level, 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/