LLC Operating Agreements – Do I Really Need One?
by Bob Harris
Short Answer: No, BUT – Long Answer: You SHOULD have one as a roadmap for your business operations and as a reminder of the governance requirements of your home state and the IRS. And an operating agreement is evidence in court that your business is a life all unto its own – separate from your personal life – and separating your business liability from your personal life.
If you think that you can live without an operating agreement, there are those who beg to differ including the folks at the SBA. The private financial information company Nerdwallet also recommends an operating agreement for your new venture – and your own personal protection. Just because your business can legally exist without an operating agreement doesn’t make that a good idea in practice, and here’s why.
Now that you have taken the plunge into the world of business ownership, legal and civil adversaries will do what they can to prove that your business is not separate from you. Why would they do that? Because as a start-up, your new business probably has few assets and little money. Legal and civil adversaries are looking for deep pockets, and that could potentially be you, personally.
Having an operating agreement is another layer of protection that says “My business is a distinct operating entity. I keep a separate life from my business.” If you keep proper records of your business activities including the creation of an operating agreement, you will find that courts are less likely to pierce the corporate veil and make you personally liable for errors done in the name of the business.
Operating agreements are the bylaws of your new business. Operating agreements take time to craft and add to the expense of a business start-up. But there are times when a well-crafted operating agreement will add to the enduring nature of your new business. An older attorney counseled me in my early days as a real estate developer. He explained that there are times that I will grapple with business decisions. He would gladly counsel me as to my choices, but the choices were mine to make. He further explained that there were other times that I will face legal questions. His answers to legal questions were to be prefaced with “read my lips – you must follow the law.” A well-crafted operating agreement can help you, the new businessperson, to discern when the state says “may” (business decisions) and when the state says “shall” (legal requirements) in the operation of your business.
The LLC operating agreements that I draft contain statutory language – the “mays” and “shalls” are spelled out for my clients. When you are struggling with what your state requires of you, you can scroll through your state’s statutes or IRS regulations online. But if you have an operating agreement you can simply refer back to the language that I have drafted for you.
Can An Operating Agreement be Drafted after I Started My LLC?
Operating agreements can always be amended as needed, and therefore can be drafted at any time during the life of your LLC. Generally, you do not need to file your operating agreement with your secretary of state – it is an entirely internal document. On the other hand, your operating agreement should be a permanent part of your Minute Book. Your state may require that you keep a minute book as a permanent record of your LLC meeting minutes and evidence of the ownership changes of your LLC as they occur over time.
I Started This LLC to Shield My Personal Assets from Corporate Liability. Does An Operating Agreement Help Me with Issues of Personal Liability?
Yes, your operating agreement can shield you from corporate liability. If a cause of action is brought against your business, and you do not keep a minute book, and keep it up to date, along with other factors that may be present, a court could determine that LLC is simply your alter ego and not a separate entity.
Appearances are everything. If it appears that you are commingling your life with your LLC, a court may “pierce the corporate veil” and find you personally liable for wrongs committed in the name of your corporation. Having the trappings of a corporation – including your operating agreement, and your adherence to it – will go along way in proving that you are not to be confused with your LLC.
That said, keep your business out of your personal life and vice-versa. Need help with an operating agreement? Call Arthur or Bob at Sayre & Harris Law, PLLC.
Next blog: What goes into an operating agreements and bylaws.