The modern limited liability company is touted as a great business choice for many situations in the business world. While most people know what a “LLC” is, few grasp the nature of the internal documents that control it. The Operating Agreement is one such document.
Why is an LLC a favored business choice? Well, it is often touted as offering the best aspects of the other major business entity choices. It offers the shield from liability that you get with the corporation, but without the administrative requirements. Even better, it offers the tax advantages of filing as a partnership with the IRS, but still offers asset protection whereas a partnership does not. While no business entity is perfect, the LLC certainly has some very strong things going for it.
An LLC is like any other business entity. It is a shell that requires certain documentation that will establish how the company is to function. The Operating Agreement is the major document that does this for the LLC. It serves the same purpose as the bylaws of a corporation, to wit, it sets out how the rights of the member owners, how the entity will be managed and other administrative matters.
Many people form LLCs without having a clue regarding what to do with the Operating Agreement. Some people file the incorporation forms on their own and aren’t even aware they need this document. Others use a cheap online service and ignore the blank forms they get from the company. All of this can lead to disaster if the LLC is sued as the lack of an Operating Agreement will more often than not lead to the termination of the asset protection element of the LLC. This means each owner [you] will be personally liable for the debts of the company!
The vast majority of limited liability companies are formed for small businesses. The sad truth is most of these companies can be set aside because the member owners haven’t put together the necessary Operating Agreements to make the company legitimate. Instead, they blindly proceed with business completely unaware they are sitting on a time bomb.