While starting a new business may seem simple (you just have to figure out what you are going to sell, right?!), taking the time to set a solid foundation for your company is vital – and is often not done. One important component to tackle? Your operating agreement.
What exactly is an operating agreement?
It is a document used by limited liability companies (LLCs) as an outline for the business’ financial and functional decisions. You can see why it’s so important when starting out – it gives you those guidelines that help to make running your business easier. A company’s operating agreement is especially important when there is more than one owner. Once the document is signed by the members of the LLC, it acts as an official contract binding them and its terms.
“An operating agreement protects the business’ limited liability status. Without it, your LLC can look like a sole proprietorship or partnership – which can jeopardize your personal liability.“
What can be included in an operating agreement:
- Details on ownership including percentages of shares
- Information on responsibilities of the members
- Distribution of profits – and losses
- Procedures for transferring interest if one member wants out
But why take the time to create an operating agreement?
- An operating agreement protects the business’ limited liability status. Without it, your LLC can look like a sole proprietorship or partnership – which can jeopardize your personal liability.
- An operating agreement clarifies verbal agreements. Even if the LLC’s members have verbally agreed to terms, misunderstandings or miscommunications can still take place. It’s never a bad idea to have terms in written form so they can be referred to, especially during disagreements.
- An operating agreement protects you and your company in the eyes of your state. Since state rules (which are typically pretty basic) govern LLCs without an official operating agreement, it’s smart to take those steps that ensure you set the rules for your business.
An operating agreement is only mandatory in five states (California, Delaware, Maine, Missouri, and New York) but we recommend everyone has one (and the SBA does too)!
For all of these reasons, it’s not a great idea to operate without an operating agreement – even if most states do not require you to have one. So do your due diligence and create your operating agreement today. Your future self will thank you later.
And remember: it’s best to consult with legal and financial professionals to assist with the setup of items like your operating agreement and other important documents for your business. Legal Zoom is a great online resource for this, but may we suggest contacting an attorney local to your area? Support another local small business while supporting your own!
Alicia Hansen is a Cleveland born, raised and educated marketing professional, writer and event producer. Her event credits include work with Cleveland Magazine, the Arthritis Foundation, Playhouse Square, Great Lakes Theater, the Cleveland Metroparks and more. Previously as L’Nique Specialty Linen’s marketing director, she played an integral role elevating the brand awareness of the organization with recognitions like L’Nique’s Top Workplaces awards from The Plain Dealer in 2016, 2017, 2018 and 2019. She teaches yoga at GrooveRyde, Platform Beer Co. and at pop-ups around Northeast Ohio. You can find her spreading a realistic yet hopeful look on life on her social feeds (@aliciamhansen) and her blog, aliciamhansen.com.
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