What is the purpose of an operating agreement?
What is an Operating Agreement?
An operating agreement is an essential document utilized by LLCs, as it details the financial and operational decisions of the business, including its rules, regulations, and provisions. The purpose of this document is to govern the internal workings of the business in a manner that caters to the specific needs of the owners. Once signed by the members of the limited liability company, it serves as a binding contract that holds them to its terms.
Why Do You Need an Operating Agreement?
To Safeguard the Business's Limited Liability Status: Operating agreements provide members with protection from personal liability concerning the LLC. Without this formal document, your LLC may closely resemble a sole proprietorship or partnership, putting your personal liability at risk.
To Clarify Verbal Agreements: Even if members have verbally agreed to certain terms, misunderstandings or miscommunications can occur. It is always advisable to have operational conditions and other business arrangements documented in writing to refer back to in case of any disputes.
To Protect Your Agreement in the Eyes of Your State: In the absence of an official operating agreement, state default rules govern LLCs. This means that each state has general rules that apply to businesses without signed agreements. Since these state default rules can be quite broad, it is unwise to rely on state governance to manage your agreement effectively.
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