Briana Robertson, the managing attorney at the Law Office of Briana C. Robertson gives helpful legal tips on the importance of an operating agreement when forming a business. ‘Why would I need an operating agreement if I am a single member LLC or sole proprietorship?’ asked a client during one of Briana’s recent business consultations and now she is going to share that same information with you!
Importance of an Operating Agreement
An operating agreement is not filed with the secretary of the state and it is not required to form an LLC. In fact, it is not needed at all to form your business so why do we need it? Having one is a great way to add an extra layer of protection between you and your business. Having an operating agreement gives your LLC (Limited Liability Company) a stronger stand. Without one your LLC begins to resemble a self-proprietorship, which is when you just open your doors and begin doing business without filing anything with the secretary of the state. The major difference between an LLC and a sole proprietorship is the paperwork filed with the state. Those papers filed with the state registering your LLC, your business articles of operation, and so on are what make you an LLC and create the separation between personal and business assets. With a sole proprietorship, you do not have any protection against lawsuits. This means if you are running a sole proprietorship then you, your business, and all your personal assets are on the table for grabs from the individual trying to sue you. When operating an LLC and someone tries to sue you, they can only sue your business and go after your business assets. It keeps your personal and business assets separate. However, it is important to note when it comes to litigation there is something called ‘piercing the corporate veil’, what this means is that you and your business are one and the same. This means you are your business and they can pierce the LLC status and come after your personal assets. How do you pierce the corporate veil? This happens when you comingle your business funds and personal funds. If you are using your business funds for personal use, for instance, all of your personal things are going on your business credit card, then you have pierced the corporate veil. This then opens your personal assets up to lawsuits as well because you and your business begin to look the same.
Why is the Operating Agreement key in all of this?
An operating agreement is like a contract you have with your business that outlines how your business operates, who is going to contribute what to your business, and how payments are going to be made. Essentially it is the rules that your business has to follow in order to operate. This is so important because now that your business has this operating agreement and rules it has to follow it puts a layer of protection between yourself and your business. Meaning if someone tries to sue your business you have this contract showing that you and your business are not one and the same but are in fact two separate entities. When using your operating agreement for protection it shows that you cannot just ‘do whatever you want to do’. It shows that your business has rules and procedures it must follow whenever it comes to operating your business and further protects and separates your business and personal assets. It enforces that shield of protection and helps you keep your limited liability status within your LLC.
What should be included in an operating agreement for my LLC?
The things you want to include in your operating agreement specifically would be things like how to make changes in your business, how you add partners to your business, how would partner voting happen, what would happen to your business if something happens to you, how will funds be managed, how will bills be paid, and how would your business be passed down. These are only some of the things to include in your operating agreement to protect yourself and your business. The operating agreement dictates how your business will operate and what should happen if you are no longer able to operate your business. It should also lay out what will happen should you need to close your business. Having this agreement in place is essential for legally protecting yourself and your business. Do you need help creating the agreement for your business? Do you have other questions regarding your business or an LLC? Contact the Law Office of Briana C. Robertson and she will be happy to help you make sure your business is protected so that you can continue operating and growing your business in confidence.
Schedule a Consultation
Do you need help creating the agreement for your business? Do you have other questions regarding your business or an LLC? Contact the Law Office of Briana C. Robertson and she will be happy to help you make sure your business is protected so that you can continue operating and growing your business in confidence. Book your consultation today. Schedule Now
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