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Why Does Your Small Business Need an Operating Agreement?

Posted by Jonathan Krems | Jul 14, 2022 | 0 Comments

In this week's Freedom Friday blog and email newsletter, I'm going to bring up a topic I've discussed several times before in the Freedom Friday blog and email newsletter, and that's why your small business needs an operating agreement.  If you have an LLC for your small business, and that's a limited liability company, and especially if have more than one member (or sometimes called “partner”), you need to have an operating agreement.  I get a lot of inquiries from prospective clients about how they can either remove or add members to their LLC; sometimes they are the very person trying to get out of an LLC, and they don't know how.  I always ask if they have an operating agreement, and that's what you have to follow, but what if you don't have an operating agreement.  In today's Freedom Friday blog and email newsletter, I want to talk about the negative consequences for your small business if you do NOT have an operating agreement, and what can happen in your small business if you don't protect it in this very important way of having an operating agreement.

First of all, if you don't have an operating agreement, then any member of the LLC can bind the LLC to a contract without the consent of other members.  Now, if you are a single-member LLC, this really isn't an issue, but even if you have two members, such as a husband and wife, and you don't have an operating agreement, either member can sign a contract on behalf of the LLC and bind the LLC to the terms of that contract, even if the other or remaining members of the LLC don't want to be bound to those terms.  However, if your LLC has an operating agreement, then either a manager is designating to enter into contracts, or a majority of members is required, if not consent by all members of the LLC.

Second, if you don't have an operating agreement for your LLC, then there are several things that a majority of members can do without the consent of the remaining members.  This is especially an issue in an LLC with more than one member.  One thing a majority of the members can do is add a new member to the LLC without the consent of remaining members and dilute the ownership interest of all the members.  Another thing that a majority of the members can do without an operating agreement is dissolve the LLC without the consent of the remaining members.  Also, if your LLC doesn't have an operating agreement, a majority of the members can sell the assets of the LLC without the consent of the remaining members.  Lastly, without an operating agreement, a majority of members can create an operating agreement for the entire LLC, and that operating agreement can be oppressive to any remaining members.  However, many of these issues can be resolved by creating an operating agreement agreed to by all the members, and some of these issues can be resolved by appointing a manager to run the operations of the LLC, or otherwise requiring the consent of all the members of the LLC.

Third, if your LLC doesn't have an operating agreement, none of the member can withdraw or leave the LLC without dissolving the entire LLC.  That may sound acceptable, but along the same lines if you have an LLC member which is causing trouble, without an operating agreement the problem member cannot be removed without the consent of the remaining members, either.  Again, these issues can be resolved by creating an operating agreement that every member agrees to at the beginning before you get to do any business, and that's why your small business needs an LLC operating agreement to avoid these kinds of problems.

If 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/

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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