First off, know that many states don’t require you to have LLC Operating Agreement; you can read which states do here. But just because it isn’t expressly required doesn’t mean you should avoid it. Operating Agreement establish the structure of your company, help protect your limited liability status, and, perhaps most importantly, create the governing rules of your business. Let’s break those down, quickly.
Customize Your Business Structure
A great advantage of having an LLC is choosing how you’ll split profits, work-load, distribution of shares and more. In more rigid structures like S-Corps or C-Corps, you have less flexibility to choose the roles and rights of each business owner.
For example, in a C-Corp, if you’ve invested 20% of the capital in the company, you’re likely to receive 20% of the profits or losses. An LLC allows you to set this up differently. For example, say that our hypothetical 20% owner actually does 80% of the work, whereas her partner invested 80% but does only 20% of the work. In their Operating Agreement, these partners could choose to split the profits and losses 50%.
Guard Your Limited Liability
LLCs, especially one-person LLCs, are given much more respect by courts if they’ve created an LLC Operating Agreement. Without the formality of the operating agreement, your company may be viewed as a partnership or sole proprietorship. This could have consequences down the road and may even jeopardize your limited liability.
Avoid Your State’s Default Rules
If you do not create an LLC Operating Agreement, you will be subject to your state’s default LLC rules. These are one size fits all’ rules, not tailored to the wants and needs of your business. It is better to take the time and plan out the guidelines best suited for your LLC.
No matter what you’re buying, selling, or trading, your company is unique. You want the ability to shape your rules to fit the goals and hopes of your business. An LLC Operating Agreement allows you to do so.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.