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How can a formal operating agreement support your LLC?

On Behalf of | Aug 26, 2021 | Small Business Law |

Establishing a limited liability company (LLC) provides a wide variety of opportunities to its members, and the founding documents of the company can lay the groundwork for future success. While your business may not need to outline an operating agreement, it could still provide significant benefits to your business as it grows.

What is an operating agreement for an LLC?

An operating agreement outlines the rights and responsibilities of the people within the business. It can outline the method for making decisions within the business, the distribution of the company’s profits and losses, the process for withdrawing from the company, the process for dissolving the company and other details. It may also delegate specific tasks for the members and the managers within the company and designate specific people who can sign documents on behalf of the business.

What are the benefits of establishing an operating agreement?

While only a few states require LLCs to establish an operating agreement for their business, it can be an important step for businesses in any location to take. First, while you may have an understanding of each person’s role, an operating agreement formalizes each person’s role in the business. By establishing the expectations for members and managers of a company, the business can prevent future conflicts about these responsibilities. It can also lay the groundwork for how your company will manage conflicts if they arise.

Operating agreements can also benefit LLCs seeking financing or investors. By outlining the company’s operations and the people who can borrow on behalf of the business, this agreement can give financial institutions and investors greater confidence in your LLC.

An operating agreement might not be required by law in many states, but establishing a detailed and carefully planned operating agreement is one important step that LLCs can take to build their company’s success.