This is the first in a series of blog posts geared towards small business owners outlining the importance of Operating Agreements and explaining the components.
If your company was formed as a limited liability company (“LLC”), chances are that your business has an Operating Agreement (sometimes also referred to as an “LLC Agreement”). Many states require such an agreement, but even if they do not, it is highly recommended that you have one- especially for LLCs with more than one member (i.e., multiple owners).
Even though most businesses have an Operating Agreement in place, the chances are extremely high that the owners have never read the provisions and don’t understand them. Perhaps an attorney prepared the agreement as part of forming the business, or perhaps the owners did it themselves and downloaded a form online or copied one from a friend.
Your Operating Agreement is important because:
- It defines roles and responsibilities. The agreement clarifies who does what, including details on management structure, voting rights, and each member's duties. This helps prevent misunderstandings and disputes down the line.
- It protects your liability. One of the main benefits of an LLC is the personal liability protection it offers. An Operating Agreement helps to reinforce this by proving your business is a separate legal entity from its owners, which is crucial if you ever face a lawsuit.
- It establishes financial contributions and distributions. The agreement spells out how much capital each member contributes and how profits and losses will be shared. This ensures transparency and fairness regarding the company's finances.
- It plans for the unexpected. It includes provisions for what happens if a member leaves, dies, or wants to sell their share of the business. This foresight can save your business from a lot of legal headaches and potential dissolution.
Legal documents can be intimidating to break down and understand. Now that you understand why you need to care about what your Operating Agreements says, look for my future blog posts breaking down the different components of an Operating Agreement.
If need legal assistance regarding your LLC’s Operating Agreement, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.
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