Why Your LLC Needs an Operating Agreement

Lots of small businesses decide to become LLCs. When that business has more than one owner, an operating agreement is crucial. Handshake agreements and free forms cannot replace careful planning. Often disagreements can arise between business partners when it is too late to work through them. Here are some issues that can be solved with an operating agreement for an LLC:

  • What percentage of the LLC does each member own?
  • Who will manage the day to day affairs of the LLC?
  • How will profits be distributed?
  • In what proportion will profits be distributed?
  • How can members sell their portion of the LLC?
  • What are the voting rights?
  • Can members compete with the company?

Think about a two person LLC. John and Greg agree to a 50-50 split on everything. They’ve been working together for years. They started the LLC together. Two years later, with the business booming, John decides to sell their share to someone completely unknown to Greg. Without an operating agreement, Greg is powerless to stop John’s sale. Now John is partners with someone he knows nothing about.

While hiring a lawyer may not be on the top on the list for a small business, it really should be. These issues are much more difficult and more expensive to deal with once they become issues. It is like ignoring going to the doctor to treat a small issue and finally going when you need major surgery. Figuring out and planning out these issues are crucial for any small business. That is why your LLC needs an operating agreement.

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