A Limited Liability Company (“LLC”) is often considered desirable to entrepreneurs and business owners when forming and setting up a business. There are various considerations and benefits such as, but not limited to: tax implications, separation of personal and business assets/debts, management flexibility, and profit distribution flexibility. In general, forming an LLC is affordable and does not generate much paperwork, two features often attractive to emerging business owners.
However, one important component of an LLC that business owners often skip is creating an operating agreement for the LLC. They either bypass the operating agreement because they do not want to spend the money having it drafted, or because they are unaware of its importance. An operating agreement is a document that governs the LLC. It describes the LLC’s operations and procedures such as, but not limited to: the operation of the business, record keeping requirements, management and member structure, removal of managers and members, distributions, succession plans, procedures for dissolution.
There are many instances where business owners cannot fathom having a serious business dispute with the other owners or foresee a business altering event occurring, and therefore they see little value or urgency in having an operating agreement. However, in business, circumstances change. For example, over time, members of LLC’s can adopt different viewpoints with respect to the direction and growth of the business; other times spouses that run a business together unexpectedly file for divorce proceedings leaving the business in jeopardy; a member of an LLC may unexpectedly die or become incapacitated creating uncertainty within the business structure; an LLC manager may breach his or her duty to the LLC and need to be removed; an LLC member may want to sell or assign his or her percentage. There are numerous scenarios that can impact a business and it is very important that an LLC has a governing document to not only protect the business, but the interests of its members.
Even single member LLC’s benefit from operating agreements. The operating agreement further establishes the separation between the business and its owner for liability and tax purposes, and also directs the disposition of business assets in the event the business closes. Additionally, if a single owner dies or is incapacitated and unable to run the business, the operating agreement will have a succession plan that stipulates who will manage the LLC under such a scenario.
Setting up a business costs money. It isn’t enough just to form an LLC with the corporate commission. Once the LLC is approved, it is very important to ensure that it is properly governed by an operating agreement that meets the needs and offers the necessary protections to its members. Spending money upfront for an operating agreement at the start of an LLC can save business owners a lot of money, stress and uncertainty later on.
If you are considering forming an LLC, please contact Andrew W. Urias, PLLC for a consultation.