Operating Agreement for LLC: Why It is Necessary
When you consider how to go about protecting your LLC, an operating agreement should be near the top of your list, for three critical reasons:
Support for Protection of Personal Liability
Most people know that a LLC business shields an owner's individual property from the promises made and the money owed by the owner's company.
There are laws across the country that keep the liability of a limited liability company separate from the liability of an individual regardless of his or her involvement with the business.
Challenges to these laws have been mounted. Bypassing the usual protections of an LLC to get directly at an owner is referred to as "piercing the LLC veil." Someone may ask a court to to hold the owners of the corporation personally liable, and not subject to the usual protections of an LLC.
One way that people have succeeded with a piercing claim is by convincing the judge that he owners themselves did not treat the business entity as one independent from themselves and that the owners were really operating in their individual capacities. This can occur if the owners ignored the LLC and did not follow LLC formalities. LLC formalities are usually found in an operating agreement.
The code of conduct for a limited liability company is often spelled out in the operating agreement for LLC. The way to defend against a piercing claim and keep the LLC safeguards in place is to have an formal document and to adhere to its tenets.
This LLC agreement gives the business its own identity and code of conduct. If used properly, the business becomes an independent body, separate but managed by the owner. The owner is thereby protected from the pitfalls of the company.
Guaranteeing the Company Runs Effortlessly
It is the laws of a given state that give life to an LLC. But what the state has created in acknowledging the existence of an LLC is essentially a legal "shell." Rules still need to be adopted as to how the LLC will be run.
This is where the operating agreement comes in. The contract lets everyone involved know what conduct is acceptable, what is not acceptable, and what requires approval for smooth operation of the business.
Without such an agreement, there is the potential for disruption of the course of business brought about by internal disagreements and misunderstandings of appropriate policy and procedure.
Plus, third parties may avoid doing business with the LLC if it too is uncertain about whether the LLC is authorized to do business with them. The operating agreement for LLC resolves all these potential problems.
Even more importantly, an operating agreement will help maintain harmony between owners, who will know that the procedures for running the business have been set down on paper.
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