An operating agreement is like the constitution for an individuals Limited Liability Company (LLC). It is the founding document that governs how everything will take place.
There are two main reasons an owner may need an LLC operating agreement.
The first is that it helps show the world that the owner's LLC is something that is separate and distinct from the owner. The LLC is not just an alter ego, it's not a slush fund but rather a separate legal entity. This distinction will help insulate the owner so that they will not get sued for their business's liabilities.
The second reason why it is necessary to have an LLC operating agreement is to define the rules of the road for how the LLC is going to operate. This is vitally important for a multi-member LLC.
At the beginning, a multi-member LLC will need to define all sorts of things about how the LLC is going to run. Common questions that the operating agreement should answer include:
How are big decisions made?
How are disputes between members resolved?
How does a member leave the LLC?
How are shares issued?
How do you add a member to an LLC?
What if an LLC member acts against the LLC somehow?
How can you kick out a member of the LLC?
It is uncomfortable to think about these issues when starting a business, however it is important to make these decisions before any issues or disagreements arise. The common advice is that the best time to think about how business partners will face challenges in the future is when they are getting along. An operating agreement helps the process and prevents complications down the road.
For more information about LLC operating agreements, contact Curington Law, LLC at 312 803-1755 or online.
