Following Steps: Why Does Your LLC Require an Operating Agreement?

What happens once an LLC is formed? The drafting of a critical document: an LLC Operating Agreement.

What you’ll discover:

Customize Your Business Structure Protection Your Liability Limitation
Avoid Following Your State’s Default Regulations

If you’ve determined that an LLC is the best company structure for you and have completed all of the appropriate paperwork for your state, you may be thinking, “What’s next?” You’ve accomplished the initial steps, but there’s one more thing you need to do to maintain your LLC in good standing. What about the document? An Operating Agreement for an LLC.

To begin, keep in mind that many states do not need you to have an LLC Operating Agreement; you can find out which states do here. But, just because it isn’t explicitly necessary doesn’t mean you shouldn’t do it. The Operating Agreement establishes the structure of your company, aids in the protection of your limited liability status, and, probably most critically, establishes the governing regulations of your organization. Let’s go through them fast.

Personalize Your Company’s Structure

The ability to choose how to divide earnings, labor load, share distribution, and other factors is a significant benefit of establishing an LLC. More restrictive arrangements, such as S-Corps or C-Corps, provide less flexibility in determining the duties and rights of each firm owner.

At a C-Corp, for example, if you’ve invested 20% of the company’s capital, you’re likely to earn 20% of the profits or losses. You may set things up differently using an LLC. Assume that our hypothetical 20% owner performs 80% of the labor, but her partner invested 80% but only does 20% of the work. These partners might opt to divide earnings and losses 50/50 under their Operational Agreement.

Protect Your Limited Liability

Courts treat LLCs, particularly one-person LLCs, with significantly greater respect if they have an LLC Operating Agreement. Your firm may be regarded as a partnership or sole proprietorship if the operating agreement is not formalized. This might have long-term ramifications and potentially threaten your restricted responsibility.

Avoid Following Your State’s Default Regulations

If you do not construct an LLC Operating Agreement, you will be subject to the default LLC regulations in your state. These are “one size fits all” standards that are not adapted to your company’s desires and requirements. It is preferable to take your time and think out the greatest recommendations for your LLC.

Your firm is unique no matter what you’re buying, selling, or trading. You want the option to tailor your regulations to your company’s objectives and ambitions. You may accomplish so with the help of an LLC Operating Agreement.

Do you want to form an LLC? Check our LLC Map for a list of everything you’ll need in each of the fifty states. If you want to learn more about establishing a company, be sure to read our guide.