In today's Freedom Friday blog and email newsletter, I want to talk about a topic that comes up frequently with prospective clients who want to start a new business, or who want to restructure their small business, especially if they are using an LLC business structure, and that is “Why does my small business need an operating agreement?”
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 for your LLC to have an operating agreement. Even if you're a single-member LLC, it is essential for your small business to have an operating agreement. Here are three (3) reasons why your small business needs an operating agreement:
1. Customize Your Small Business Structure
The first reason why your small business needs an operating agreement is you want to customize your small 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 a multi-member LLC, 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 should 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 your small business needs an operating agreement 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 necessary 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 you 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 your small business needs an operating agreement 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, 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 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/