Starting a new business is a very exciting time as you begin to transform your dreams into reality. It requires a lot of hard work, strategizing, and refining various skills. During this time, many people forget about the underlying paperwork that allows your business to operate legally within your state. While your entrepreneurial spirit may not necessarily be accompanied by a passion for law, an operating agreement for an LLC is still a very important document.
Understanding Operating Agreements for An LLC
A Limited Liability Company (LLC) is one of the simplest business structures to protect your personal assets from the unfortunate instance of your business being sued. An LLC can be owned by one individual or by a group of owners.
Regardless of whether the business has one or more owners, an operating agreement is important. Failure to draft one means that the business will be governed by the default rules set forward by the state. An effective operating agreement will be tailored to the specific needs of your company.
Benefits of an LLC
There are many benefits in choosing to set up your business as an LLC. As a single owner, an operating agreement will protect your limited liability status and prove that you were running your business as an LLC as opposed to a sole proprietorship.
A major benefit of an LLC is that the owners are not personally liable for debts or lawsuits (on the condition that there is no fraudulent or criminal behavior involved).
The profits of an LLC go directly to the owners to submit their own individual tax returns. Essentially this means the business profits are only taxed once. An LLC also contributes towards building a credit history which is useful for access loans and other lines of credit.
LLC’s are fairly easy to form in comparison to other business structures. They require less paperwork to set up and keep running. For example, annual meetings and formal officer roles are not a requirement for an LLC. The LLC ownership structure is also significantly more flexible.
Operating Agreement Factors to Consider
The operating agreement is an opportunity for you to legally define the business’s financial and functional decisions. The following factors are important to consider when drafting the operating agreement.
- Profit – how will the profit be divided among the owners
- Management – who will manage the LLC
- New members – what is the process for new members (or owners) joining the structure
- Selling out – what is the process if a member wants to sell his or her stake in the business
- New business – what will happen if the LLC pursues a new line of business
- Asset distribution – in the instance of the business dissolving, how will assets be distributed
- Tax – what are the tax consequences of the LLC’s structure and set up
These are some intricate questions to ask and can cause a bit of heat when discussing. It best advised by a lawyer who is well acquainted with the state’s legal requirements for an LLC.
Risks of Not Having An Operating Agreement
There are many risks of an LLC not having an operating agreement and they range from ill-advised decision-making to inviting new members on the board without full agreement from other owners.
While some risks can be quite drastic, such as unequal profit share and other heated financial disputes, there are also less obvious risks. Arguments among owners regarding roles and responsibilities in the company can create a tense and unproductive working environment and disputes can arise due to the lack of prior agreement.
Another major risk is that Florida’s default LLC laws may not optimal for the business. An operating agreement can prevent these disputes and define a customized legal agreement that best suits the business.
There is no one-size-fits-all approach. At Handin Law, we offer expert business law services to help you draft the most effective operating agreement for your LLC. Call us at 1-877-815-4560 to book a consultation.