LLC operating agreement, pen, glasses and calculator on desk

What Is an Operating Agreement? When Should You Review It?

Bundy & Fichter PLLC Aug. 7, 2023

An LLC (Limited Liability Company) is a distinct legal entity similar to a corporation, allowing owners to conduct business under the company's name while providing protection from certain business risks and liabilities. Except in cases where an LLC owner signs a personal guarantee or directly incurs a personal obligation, the owner is typically shielded from personal liability for standard business risks and debts, subject to exceptions.

LLC members may face personal liability depending on the state where the LLC is organized. Such liability arises if they personally guarantee an obligation, commit fraud, neglect certain tax payments, fail to pay an employee as required, harm the company or others, or commingle personal and business assets. To prevent disputes and legal issues, crafting an operating agreement during LLC formation is crucial, even for single-owner businesses.

If you're starting a new LLC or joining an existing one and need to draft or review the company's operating agreement, reach out to the small business attorneys at Bundy & Fichter PLLC. Their experienced attorneys can ensure your operating agreement suits your specific needs.

What Is an LLC Operating Agreement?

An LLC operating agreement, akin to a corporation's bylaws and shareholder agreement, governs financial and decision-making aspects of the company, offering a structured framework and operational guidelines. States such as California, Missouri, and New York mandate operating agreements, while others do not. However, operating agreements remain vital for a successful LLC. In some states like Washington, an oral or implied agreement is assumed. However, oral or implied agreements often lead to costly disputes as memories fade and conflicts arise. A written LLC operating agreement is recommended from the outset.

A key role of an operating agreement is to address and resolve disputes. Identifying potential types of disputes in advance is crucial. Disagreements may include disputes over company direction, member departures with compensation, member deaths with successor interests, or member misconduct. A comprehensive written agreement from the start can prevent misunderstandings and save on legal fees.

A dispute resolution mechanism is integral to an LLC operating agreement. When a member exits, the agreement should detail the valuation and compensation of their share. If a member harms the business, the agreement should define the corrective actions.

Mediation or arbitration may be used by some companies and owners to resolve disputes. Having a pre-agreed resolution mechanism is essential to avoid protracted and expensive lawsuits. Many well-drafted LLC operating agreements include provisions to minimize court involvement, like mutual buy-out clauses. Such provisions allow an owner dissatisfied with the company's direction to offer to buy another owner's interest, with the receiving owner having the option to sell or buy the offering owner's share at the same price and terms.

Consult an attorney to review an existing operating agreement or create a new one to avert potential conflicts among members.

When Should an Operating Agreement Be Reviewed?

Review your operating agreement whenever significant changes occur within the LLC, such as member departures or new member arrivals. Ensure ongoing consensus on business operations and dispute resolution methods. Given changing laws and tax rules, periodically review your LLC operating agreement even if no disputes or changes have occurred. This keeps everyone aligned and ensures the agreement reflects current business realities.

A small business attorney can review or draft your agreement as needed. Contact Bundy & Fichter PLLC to discuss your LLC operating agreement.

Knowledgeable Legal Counsel Can Help.

Entrepreneurs often overlook the potential for disagreements among business partners. Disputes can jeopardize both the business and friendships. Ensure your business survives turbulent times by planning for dispute resolution from the start.

Regularly review your operating agreement, even if no major disputes have arisen, to keep it in line with current business conditions. Bundy & Fichter PLLC's attorneys are prepared to assist with your operating agreement and other small business needs. Whether forming an LLC or needing a review, seek experienced guidance. Bundy & Fichter PLLC proudly serves clients in Seattle, Washington, Oregon, Texas, Florida, and nationwide.