The Importance of the Operating Agreement

The operating agreement may just be the most important document your new small business has. Not only is an operating agreement required by New York law, it is crucial for defining the rules of management and the rights of the members. A well written, well thought out operating agreement can foresee potential problems and provide detailed plans for solving the problems. An operating agreement will define profit sharing and decision making procedures. So if a disagreement occurs the members have a document they can consult in order to resolve the dispute.

An operating agreement will ensure that you set the rules that apply to your business and not the state. For example, under default state laws, any member of the LLC may be able to open a bank account and borrow money in the name of the LLC. If you wish to avoid this, the operating agreement may stipulate that only certain members may open accounts and borrow money. The operating agreement can also specify for the distribution of profits and losses that is different from the default.

Some of the most important provisions in the operating agreement are the buy/sell provisions. These will outline what happens when a member wants to sell his or her ownership interest, when the members want to add an additional member, when a member files for bankruptcy or goes through a divorce. These provisions set out the rules for how, when and even for how much a member may be added or removed.

Some points to consider when discussing the the importance of the operating agreement:

  • Members interest in the LLC
  • Each member's responsibilities within the LLC
  • Allocations of profits and losses
  • How the LLC will be managed
  • Rules for voting
  • Buy/sell scenarios

This post is for informational purposes only. It is not intended to be, nor should it be construed, as legal advice. Always consult an attorney, licensed in your state, before taking legal action.