Why You Should Have an Operating Agreement With an LLC
It is entirely possible to run a business without an operating agreement, but will that business be successful? Probably not. Running a business without an operating agreement is a bit like a Birmingham visitor trying to make it from the Birmingham Zoo to Oak Mountain State Park without a GPS. That person is bound to make a lot of unnecessary stops, experience high levels of frustration, and expend more resources than had he or she just put forth the funds to buy a GPS in the first place. Yes, crafting an operating agreement can be a time-consuming process, but as you grow your business, it can save you a lot of headache, time, and money.
If you are a member of an LLC, and if you have yet to create an operating agreement, contact the Alabama corporate litigation attorneys at Cloud Willis & Ellis to get started on crafting this important contract today.
What is an Operating Agreement?
In brief, your operating agreement is your how-to manual for running your business. It defines key aspects of your business such as member names, roles, and responsibilities. It should also state what percentage of the business each member owns and how profits and losses will be distributed to each party.
An operating agreement also outlines how you and other members of your LLC will make business decisions. For instance, the person who runs the hands-on part of the business may be responsible for directing day-to-day functions, while the person who takes care of the finances may oversee investments. Your operating agreement may state that all members should be involved when making major decisions, such as those regarding expansion, purchasing equipment or real estate, or changing locations.
Another important issue your operating agreement should address is the death or withdrawal of a member of the LLC. The agreement should outline to whom a member may sell his or her portion of a company should he or she wish to leave the company for whatever reason. It should also address to whom shares of the company will go upon the death of a member—to his or her family members or to other members of the LLC.
What Happens When You Do Not Have an Operating Agreement?
If you do not have an operating agreement, you and other members of the LLC are bound to run into several pitfalls. Those pitfalls will likely occur in your day-to-day operations (for instance, if you do not have clearly defined roles, you may find you and your partners arguing amongst yourselves over who handles the finances/customer relations/labor), but they are sure to arise in long-term complications. Some common long-term issues LLCs run into when they operate without an operating agreement include the following:
- The LLC must cease operations because a member has passed away;
- A deceased member’s share of the company passes to the wrong person, such as a disgruntled ex-wife;
- The majority member sells out to a person who does not want to buy the minority member’s share, thereby leaving the minority member with a new partner;
- The majority member wants to sell out but the interested party only wants to buy if he or she can buy the remaining shares; the minority member does not wish to sell;
- The majority member sells out without first offering his or her shares to the minority member, which is legal because no right of first refusal clause exists; or
- One member strips the LLC’s bank account and puts the money into a new account solely in his or her name, thereby leaving the other member or members without funds.
Those are just a few of the most common issues LLCs face when they choose to operate without an operating agreement. You can prevent these issues by putting forth the time and effort into creating a sound contract that guides your business decisions.
Why Retain the Help of a Lawyer?
At Cloud Willis & Ellis, we are well versed in contract law and can help you craft an operating agreement that includes all the necessary provisions. Though you can find sample agreements online, every business is unique and requires unique considerations. Our Alabama contract attorneys can help you evaluate your distinctive needs and draft an agreement designed to help you avoid those issues you are most likely to encounter. Contact our law firm today to discuss your needs more in depth.