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Why Are Operating Agreements Essential?

Posted by Jonathan Krems | Oct 31, 2021 | 0 Comments

In today's Freedom Friday blog and email newsletter, I want to talk about a topic that comes up frequently with prospective clients who are wanting to form an LLC, and that is operating agreements, and why they are essential to the success of your small business.  This also comes up with prospective clients who are interested in restructuring their business, too, because if you are adding an additional owner to your LLC, or a member of the LLC is leaving, the operating agreement needs to be updated as a result, and its always best to consult with and even hire a lawyer to help you make these changes in your essential business documents.  In today's Freedom Friday blog and email newsletter, I'm going to answer the question, “Why are operating agreements essential?”

Oklahoma law does not require your LLC to have an operating agreement.  It is absolutely optional.  However, it is absolutely essential to the success of your small business.  Even if you're a single-member LLC, it is essential to have an operating agreement.  There are three reasons why having an operating agreement is essential to the success of your small business.

1.  Customize Your Business Structure

The first reason why an operating agreement is essential to the success of your small business is that it allows 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 a member-managed LLC.  You can also elect to have your LLC managed by a manager who is not a “member” (or owner) of the LLC.  For multi-member LLCs, you may also wish to choose a specific member to manage the LLC, to the exclusion of other members who are passive investors.  This is a very common decision, but it needs to be documented in your operating agreement to avoid problems.  Further, if you do have a multi-member LLC, there needs to be provisions of your operating agreement which describe the roles and responsibilities of the members of the LLC, and explain the process of how decisions are made, and what happens in the event that the members of the LLC disagree.  The operating agreement should also have what's called a “buy-sell provision,” which explains how the LLC will handle a situation where a member of the LLC needs to leave the LLC (either voluntarily, or otherwise).  This provision is similar to a pre-nuptial agreement prepared before a couple gets married.

2.  Avoid Default Rules

The second reason why an operating agreement is essential to the success of your small business is that the operating agreement will allow your LLC to avoid Oklahoma's default rules for LLCs.  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 doesn't have an operating agreement, the rules for governing your LLC default to the Act, and it says very little about running your business, and gives very little guidance on how to handle all the issues which a solid operating agreement would actually address.

3.  Demonstrate Limited Liability

The third reason why an operating agreement is essential to the success of your small business is because the operating agreement will demonstrate your limited liability as a member of the LLC, and this is especially important if you're a single-member LLC.  The operating agreement demonstrates 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,” then you expose yourself as an individual business owner to liability.  Simply forming an LLC is not enough, especially if you're a single-owner LLC, you need to have an operating agreement to prove your limited liability to the world.

There are online resources available to help you draft an operating agreement for your LLC, but as always, its best to ask an attorney to help draft one for you.  Many attorneys charge a reasonable flat fee for this service, as part of a business startup package.

If you are interested in starting a small business anywhere in Oklahoma, or you are interested in restructuring your small business, 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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