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What is an Operating Agreement?

Posted by Jonathan Krems | Oct 24, 2021 | 0 Comments

In this week's Freedom Friday blog and email newsletter, I want to talk about a question I am frequently asking by many of my clients, especially those who are wanting to start a new business, or those looking to restructure or formalize their existing business, and that is what is an operating agreement.  In today's Freedom Friday blog and email newsletter, I want to get down to the basics, and explain what an operating agreement is, and why it is important.

So, first of all, what is an operating agreement?  If you're small business is structured as a limited liability company (LLC), the operating agreement is the “bible” for your small business; it is an internal document that governs how your small business operates.  The contents of the operating agreement will assist you in the daily operations and management of your small business, even if you're a single-member LLC.

More importantly, why is an operating agreement important?  I want to share with you three (3) reasons why an operating agreement is not only important, but also essential, for the success of your small business.

1.  You Can Customize Your Business Structure

The first reason why an operating agreement is essential for the success of your small business is that an operating agreement allows you to customize your business structure.  Your operating agreement will determine whether your LLC is member-managed or manager-managed.  The default option is member-managed, but many times in a multi-member LLC, one of the members is selected as “manager,” and such a choice needs to be included in your operating agreement.  Also, if you have a multi-member LLC, your operating agreement needs to describe the roles and responsibilities of the members (who are the owners) of the LLC.  The operating agreement needs to explain how decisions are made, especially in the event the members disagree.  Further, the operating agreement should have a buy-sell provision, which explains how the LLC will handle the situation if a member of the LLC decides to leave, or is disabled, incapacitated, or dies.  This provision is similar to a pre-nuptial agreement prepared before a couple gets married.

2.  You Can Avoid Oklahoma's Default Rules for LLCs

The second reason why an operating agreement is essential for the success of your small business is that an operating agreement allows you to avoid Oklahoma's default rules for LLCs.  Oklahoma law does not require an LLC to have an operating agreement; it is completely optional.  However, just like if someone dies without a will, if you want control of your estate, you need to have a will, because if you die without a will, the statutes will determine what happens to your property and your estate.  The same is true with an LLC.  If you want to have control of how your LLC operates, you need to have an operating agreement.  If you don't have an operating agreement, and there is a problem, the default rules for LLCs are found in the law.  Oklahoma has a law, its called the Oklahoma Limited Liability Company Act.  The Act is not necessarily a bad statute, as it allows to form your LLC to begin with.  However, the law does not say very much about how to run your business and does not provide much guidance as your operating agreement would provide you, especially if there is an issue or a problem.  This is why its important to have an operating agreement, so do you not default to the Oklahoma default rules for LLCs.

3.  You Can Have Limited Liability Protection

The third reason why an operating agreement is essential for the success of your small business is that your operating agreement will help provide you with the limited liability protection you're looking for in an LLC.  Especially if you have formed a single-member LLC, the operating agreement will demonstrate that the LLC is a separate entity from you as an individual person.  If you do not have an operating agreement as a business “formality,” then you can expose yourself as an individual person to liability from your business, even after you have formed an LLC.

If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and looking to grow, 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

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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