What Is an Operating Agreement? Does Your Business Need One?
Typically, you can register your Limited Liability Company (LLC) without having an operating agreement. But the operating agreement offers a couple of benefits to your business.
Why You Should Have an Operating Agreement
Have you considered what your world would be like without rules? Just as we live by rules, so should your small business. In the business world, this is called an operating agreement. The Small Business Administration (SBA), defines an operating agreement as a document used by businesses to outline financial and functional decisions, including rules, regulations, and provisions. The purpose of the document is to allow business owners to establish how their internal operations are governed. Think of it as a contract, that once signed will bind the business owners to its terms.
What Are Some Reasons That a Business Would Need an Operating Agreement?
- Operating agreements give members further protection from personal liability to the LLC. Without this formality, an LLC can resemble a sole proprietorship, and jeopardize personal liability.
- Many small businesses are formed through a series of conversations and verbal agreements. An operating agreement solidifies these agreements in writing and helps to avoid misunderstanding and miscommunication among owners.
- Without an operating agreement, your business entity is subject to the default rules established by your state of formation. In most cases, the default rules are very general and do not capture the intricacies of your small business partnership.
What Is Included in an Operating Agreement?
While the business name, description of the services offered, member names, and member address are all standard within the operating agreement, the document can contain the following items depending on the complexity of the organization. Keep in mind these are the most common items, but the list of what could be included in an operating agreement is endless.
- Percentage of members ownership
- Voting rights and responsibilities
- Powers and duties of members and managers
- Equity structure (contributions and ownership)
- Distribution of profits and losses
- Holding meetings (when and where)
- Buyout and buy-sell rules (procedures for transferring interest or in the event of member death
How Do You Create an Operating Agreement?
Business owners can find examples of operating agreements online and craft their own version to suit their specific needs. The Duquesne SBDC is here to help our clients understand this process, and you can access no-cost consulting, templates, business tools, and education resources by completing the consulting request form here.
The Duquesne University Small Business Development Center (SBDC) offers no-cost, confidential consulting services and educational programs in Southwestern Pennsylvania to empower entrepreneurs and small business owners with the knowledge they need to start, grow, and prosper.