Forming an LLC, or limited liability company, is a sound strategy for even the smallest new business. It offers legal protection for your assets, and gives you more options regarding how your taxes are handled than you would have as a sole proprietorship or independent contractor. If these sorts of protections are what prompted you to go the LLC route, an operating agreement is practically mandatory. These agreements can offer you further protections while ensuring you maintain the proper level of control over your LLC management.
Limited Liability Company Operating Agreements Give You More Control of Your Business
When you begin the process of forming an LLC, you will learn that the government has already established a set of general guidelines for how these types of businesses should be governed. What may not be quite as clear in the documentation, though, is that without an operating agreement these guidelines are applied to your business by default.
In essence, your LLC management structure, and even the allotment of your profits, is automatically determined by state and federal guidelines. Luckily, these guidelines tend to have one commonality across the board: the ability to individualize aspects of your LLC management through the use of an operating agreement.
Of course, your agreement may not include any rules that violate the law, but you still have quite a bit of freedom to make your own adjustments, provided you do so in the form of a formal operating agreement.
An Agreement Helps You Solidify Your LLC Management Structure
This aspect is particularly important if you are forming an LLC with one or more partners. An operating agreement detailing each partner's position, responsibilities and even voting rights in regard to major issues can save you from significant hassles down the road.
As any successful business owner can confirm, comprehensive written policies are the backbone of a good company. Consider the agreement your company's very first official policy.
You Can Further Protect Your Assets Should the Worst Occur
Your goal, of course, is to stay on the good side of the law so that you will never have to defend your assets in court. If, however, you do find yourself in the legal situation such as filing for bankruptcy, an operating agreement can help you keep your business and personal assets separate.
If you are the sole owner of your business, this precaution is likely part of the reason you decided on forming an LLC as opposed to a sole proprietorship. While this should be enough to keep your assets legally separated, in some cases the courts will require further evidence of the separation. An operating agreement that lays out exactly which assets and property belong to the business keeps the waters from being muddied, offering you the best possible protection even in the worst-case scenario.
An Operating Agreement is an Essential Part of Forming an LLC
As you can see, there are numerous benefits to writing an operating agreement, whether you plan to be a business of one or 100. Creating more paperwork for yourself may be the last thing that you want, but the control and protections it can provide make it a worthwhile endeavor, if not an essential step in building your limited liability company.
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