While many states do not legally require your Limited Liability Company (hereinafter “LLC”) to have an operating agreement, it is not a wise idea to operate an LLC without one, even if you are the sole owner of your company. An operating agreement will help you protect your limited liability status, specify financial and management roles to avoid common misunderstandings, and in order to make sure your business is governed by your own rules, not just the default rules created by your state.
For instance, if an owner/manager contributes more assets than the others, you may want to give that person a greater share of the profits. Or you may want one or more of the owners to receive a salary for their participation and services. Most importantly, you will need to have tailored provisions on how to value an owner’s interest in the business if the owner dies or leaves the company. It will also get you to focus on issues you might not have thought through with your other business partners.
A well-drafted Operating Agreement will provide the following, but not limited to:
- Provide a framework for the settlement of disputes between members/managers;
- Prevent a member from selling his/her interest to a third party without first offering it to existing members (rights of first refusal);
- Provide a framework for the purchase of membership interests by the remaining members in the event a member dies or becomes legally incompetent;
- Prevent a member from competing against the company both now when he is a member and for a number of years after leaving the company;
- Require members to maintain the confidentiality of all customer names and other company records;
- Prevent a member from impairing the goodwill of the company;
- Prevent a member from soliciting customers away from the company. Provide for the indemnification of the members and officers of the company;