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Why is an Operating Agreement Essential to My Small Business?

Posted by Jonathan Krems | Dec 22, 2021 | 0 Comments

In today's Freedom Friday blog and email newsletter, I want to talk about a topic that comes up a lot with prospective clients who want to start a new business, or who want to restructure their small business, especially if they're using an LLC business structure, and that's “Why is an operating agreement essential to my small business?”  Even if you are the sole owner of a single-member LLC, you need to have an operating agreement in place in order to have a successful small business.  While an operating agreement is not required by law, it allows you as the small business owner to customize your small business structure, avoid the default rules in Oklahoma law, and demonstrate limited liability.  In today's Freedom Friday blog and email newsletter, I want to share with you five (5) essential elements, or provisions, in every LLC operating agreement.

1.  Who Owns the LLC

The first essential element in an LLC operating agreement is who owns the LLC.  LLC owners are usually called “members,” and a properly drafted LLC operating agreement will identify the member(s) of the LLC and their “membership interest” of each member, which is the percentage of the company that specific member owns.  For example, in a single-member LLC, there is only member, and he or she owns 100% of the company.  However, in a multi-member LLC there is more than one member, and membership interests are not necessarily the same for each member.  In some cases an LLC might have a “silent partner.”

2.  Who Manages the LLC

The second essential element in an LLC operating agreement is who manages the LLC.  LLCs can be managed by their members, or by a manager.  The members (owners) of the LLC can decide that one of them will be the manager, or they can also appoint an outside person (someone who is not a member) to be the manager.  In a member-managed LLC, management decisions are made by the members and each member votes their membership interest (percentage) for those decisions.  Otherwise, the manager gets to make those management decisions.  However, all of these details should be spelled out in the LLC operating agreement.

3.  Who Makes Which Decisions

The third essential element in an LLC operating agreement is who makes which decisions.  This is not the same issue as who manages the LLC, or the business.  This is a larger issue because some decisions should be made by the members and not the management.  For example, big-picture decisions such as adding a new member to the LLC or ending the LLC, should require the voting and participation of all the members.

4.  What Happens if a Member Dies

The fourth essential element in an LLC operating agreement is what happens if a member dies.  Why is this important?  Well, the issue is not really if a member dies, but also what happens if one of the LLC members files for bankruptcy, is incapacitated, or just wants to leave the LLC voluntarily and follow other pursuits.  There needs to be a provision in the LLC operating agreement for either the LLC itself or its members to buy the departing member out.  The LLC operating agreement needs to address what type of events (e.g. bankruptcy, death, etc.) trigger the option to buy out the departing member, and the operating agreement also needs to address how to value the membership interest of the departing member.

5.  How to Dissolve the Company

The fifth essential element in an LLC operation agreement is how to dissolve the company.  There needs to be a provision for dissolving the LLC, which is not an automatic event.  Before an LLC is dissolved, there are steps which must be taken to “wind up” the finances and other business issues of the company.  An LLC operating agreement should specify how the assets of the LLC will be disposed.  In Oklahoma, articles of dissolution must be filed with the Oklahoma Secretary of State.  All of this should be addressed in the LLC operating agreement for your small business.

If you are interested in starting a small business anywhere in Oklahoma, or you need legal help building, protecting, or defending your small business or other assets, 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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