Operating Agreements: The Unsung Hero of Small Businesses

As a small business owner in Oklahoma, hopefully you are familiar with limited liability companies (LLCs). If not, give this blog post on LLCs a read first; then come back to read this one. Due to an LLCs flexibility, potential pass-through taxation, and limited legal liability, LLCs are a popular choice when it comes to business entities. But, what many small business owners, especially single-member LLCs, don’t realize is that an often overlooked document called an Operating Agreement is crucial to the success and protection of any small business.

So, think of an Operating Agreement as the constitution of your LLC. It should outline the internal rules and regulations that govern how your business operates. Now, Oklahoma law does not require an Operating Agreement for LLCs. HOWEVER, just know that the default laws in Title 18 will apply to your LLC if you do not have an Operating Agreement.

Having a well-drafted Operating Agreement is essential for several reasons:

(1) Clarifies Ownership and Management. An operating agreement should clearly define the ownership structure of your LLC. This will be required for any financing or loan dealings.

(2) Establishes how voting/management decisions are made. Whether its by majority or unanimous, an operating agreement lays out how large decisions are made.

(3) Provides even more limited liability protection. Having a well crafted operating agreement helps protect yourself (and your personal assets) from liability arising from the LLC. While I will not bore you with the details, if you are comingling assets and otherwise not acting as a separate entity, your LLC will not protect you. Having an operating agreement (and subsequently following it) provides evidence that you are acting as a separate entitiy.

(4) Providing procedures for disputes and distributions. Your operating agreement should provide the process for resolving internal disputes. Further, it should also provide for distributions in the case of death, incapacity, or bankruptcy. It should also provide the procedures for dissolving the company.

Conclusion and Additional Tips:

DO NOT RELY ON GENERIC ONLINE TEMPLATES. Invest in hiring an attorney to draft your operating agreement. These are the rules and laws about how to operate your company. If you have a generic operating agreement, you must abide by that agreement or risk losing your limited liability. How much is your company worth? If you purchase a $50.00 operating agreement, you are getting a $50.00 operating agreement.

Review and Update your Operating Agreement Regularly. As your business grows and evolves, your needs will change. Ensure your operating agreement reflects those changes.

Remember an Operating Agreement is an investment in the future of your business. By taking the time to create and maintain this vital document, you can set up your LLC for success and protect yourself from potential legal and financial issues. If you want an Operating Agreement drafted by an experienced attorney, give us a call or email.