When starting a business, many business partners choose to structure their company as a limited liability corporation (LLC). LLCs help to protect owners from personal liability while also providing a corporate structure to work within.
LLCs do not come with any inherent rules for operation. Instead, the co-owners (also known as managers) of an LLC must decide on an operating agreement that will govern the way that the LLC is run. While operating agreements are not required, they are crucial to a successful LLC for many reasons.
Ensuring Clear and Straightforward Governance in the Inland Empire
The most important reason for having an operating agreement for your LLC is to make sure that all co-owners are on the same page regarding the operation of the LLC, and that the rights and responsibilities of each of the owners are carefully set forth.
Operating agreements govern how much interest any given member has in the LLC, including who may be majority or minority owners. They also set forth the rules for decision-making in the LLC, such as how voting occurs and what kinds of issues require voting before a decision can be made.
While no business owner wants to think about the possibility that their business relationships will go south, operating agreements also set forth rules and procedures for handling disputes between co-owners, how a member of the LLC can be terminated, and what happens if a member decides to leave the company. These types of rules can be crucial to avoiding prolonged disputes down the road.
Protecting Your Personal Interest
Another reason that operating agreements are crucial is that they help to ensure that co-owners of an LLC are protected from future liability related to the company. Most business owners choose to set up an LLC in order to limit the possibility of future liability and create distance between their personal finances and the behaviors of the business.
The operating agreement serves to confirm and finalize the LLC structure and the separation between the LLC and its owners. Without an operating agreement in place, co-owners in an LLC may risk the possibility that their company will be construed as a joint partnership or proprietorship rather than as a true LLC. This could expose owners to serious potential liability down the road.
Likewise, an operating agreement also makes sure that your LLC is governed by the rules and structures that you have developed rather than the rules of your state. Every state has LLC rules or an LLC act that governs how an LLC will be run in the event that no operating agreement exists. These rules may be contrary to the structure you would prefer. But without a formal operating agreement in place, it can be difficult to argue that these rules don’t apply.
California Attorneys Helping You Develop Your Operating Agreement
When starting a new business, it can be incredibly tempting to skimp on getting legal assistance to develop and draft an operating agreement in order to avoid the possible costs. While this approach may seem beneficial in the short term, it is often disastrous in the long term as it can lead to bitter business disputes down the road.
At CKB Vienna, LLP, our corporate and transactional attorneys can assist you in drafting organizational documents for your company that will protect your interest in the company and ensure that the structure you and your co-owners have developed is memorialized in writing. For more information, contact us online or at (909) 980-1040.