Why You Need An Operating Agreement For Your Llc

Are you operating a business or holding an investment as a limited liability company? If so, you probably want an LLC operating agreement for your limited liability company--and for at least four easy-to-understand reasons:

Your State May Require an LLC Operating Agreement

Most states don't require you to have an operating agreement. But there are some that do, including New York, Illinois, California and Connecticut for all practical purposes. Accordingly, you may need to have one just as part of setting up the limited liability company in the first place.

Note: You typically don't need to show the document to a state that requires the operating agreement. You're just supposed to have it in place on your end.

Your Bank Probably Requires an LLC Operating Agreement

The LLC operating agreement describes how the members (owners) of the limited liability company govern the LLC and what they can and can't do. Accordingly, in order to prove that the LLC actually has the ability to setup a bank account, your bank will probably require you to supply a copy of the document before setting up a bank account.

Note: There are times when other outside parties will also require you to verify that you are permitted to make some decision or initiate some action on behalf of the limited liability company, too. For example, if you wanted to buy real estate, you may need to provide a copy of the llc operating agreement to the escrow company to prove the LLC can buy and sell real estate.

Liability Protection Improves with an LLC Operating Agreement

Particularly in cases where a limited liability company is owned by a single member, the need for a limited liability company operating agreement might seem slight. After all, do you really want a governing document that specifies what you can and cannot do with and within the LLC you own? It seems kind of silly, right?

However, if you speak with business lawyers about the liability protection that limited liability companies and in particular that a single member LLC offers, they'll frequently say that a limited liability company doesn't get as good of protection if an operating agreement isn't in place--and meticulously honored.

Accordingly, you want an LLC operating agreement in place for liability reasons...

Member Disagreements and the LLC Operating Agreement

One final point about the benefit of using an LLC operating agreement should be made. If you're entering into a business or investment with partners, you may want one for a fourth reason. An LLC operating agreement, as the principal governing document for the limited liability company, may help you prevent or more easily resolve disagreements between the limited liability company members.

Tip: If you plan to elect special tax status for an LLC--say, for instance, that you'll elect Subchapter S status--you want to include language about the tax election in the text. If this sounds like something that may be an issue, be sure to talk up front about the taxation issues when you work with your attorney to have the operating agreement drafted.

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