Without an LLC Operating Agreement, You Are Only Inviting Trouble

An LLC without a written LLC Operating Agreement is like a country without any laws or rules. The result is anarchy and confusion. The ultimate fate is likely war which leads to expensive negotiations and likely business failure in the business world. A formal written LLC Operating Agreement will not only set but preserve order for an LLC business.

When you start an LLC for your business, you are creating a separate entity as the operator of your LLC business. This entity needs a set of rules so the people that are involved with the LLC business will know how to properly govern the LLC business and what can and cannot be done.

These rules and processes are set forth in a written LLC Operating Agreement for the LLC business. Many ask whether an LLC Operating Agreement is legally required. In a few states, a written agreement is required but sadly in most states it is not.

This is the biggest problem with LLC statutes to date and I sincerely hope state legislatures will mandate written LLC Operating Agreements in the future. This is because without an agreed set of rules, people get confused.

Members do not understand exactly what rights they have in the LLC. Those who manage the LLC business are confused as to how to do their jobs. The accountant of the LLC will want to know exactly what rules to apply when preparing tax returns.

The above are just a few example of what is addressed in an LLC Operating Agreement. Major topics include what each Member owns in the LLC, what rights the Member has, how LLC actions are approved, what votes are necessary and who the officers are.

Many businesses will insist on only doing business with an LLC that has a written LLC operating agreement so they can be sure that the transaction they are entering into is properly authorized by the LLC and its members or managers.

When you first start an LLC, everything seems in order and everyone is happy. It is not until the LLC business starts operating and evolving that questions and issues come up. Do not make the mistake of spending money, time and other resources to build an LLC business without any rules.

Insist on having a written LLC Operating Agreement that contains rules and other written processes that are appropriate for your LLC business. Then, have all Members read it before they become a Member and sign it so everyone has agreed to the set of rules.