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Operating agreements: What are they and why do you need them?

On Behalf of | Dec 28, 2022 | Business & Commercial Law

Setting up a new business is an exciting, and often stressful, time. You want to make sure that you’re doing everything right and are complying with all the legal requirements expected of you.

If you’re running your business as an LLC, an operating agreement can be the answer to defining how your company should be run.

What is an operating agreement?

An operating agreement is a legal document used by businesses to outline how they intend to carry out the internal operations of the business. This can be both financial and operational. It also deals with important topics such as the percentage ownership of each member, voting rights and what should happen in the event of dissolution.

Ultimately, it ensures the business is complying with governing rules and regulations and creates a legally binding document between all members of the LLC.

The benefits of an operating agreement

Ideas and responsibilities for a business are often things that are discussed in conversation. Having an operating agreement makes sure you have a record, in writing, of how the business is to be managed and structured. Where there are multiple members in the LLC it forms a binding contract between parties to cover all important decisions.

Most importantly, having an operating agreement in place reduces your personal liability. It helps the law to recognize the business as an LLC as opposed to a partnership or sole proprietorship. In the event something goes wrong or the business faces legal action, this can be essential in avoiding the financial consequences that come with an expensive lawsuit.

Setting up an LLC requires a lot of paperwork in order to comply with laws and regulations. Having the help of a legal professional can help you to make sure you have all the necessary documents in place.