Why does a small business need an operating agreement? Part 1

“Why do I need an operating agreement?  It is an unnecessary cost!”

Many clients ask this question of us when they are forming their businesses.  The answer might surprise you because the operating agreement seems like just an extra add-on, and it is usually overlooked or intentionally skipped … well, ahem, surprise,  it shouldn’t be skipped!  This is part one of several parts discussing the operating agreement.

Part 1 – What is an Operating Agreement?

The Operating agreement is one of several essential parts of your business.  The basis of the operating agreement is exactly what it sounds like … the agreement between the members of an LLC as to how their new business should operate.  North Carolina statutes describes the operating agreement this way: “Any agreement concerning the LLC or any ownership interest in the LLC to which each interest owner is a party or is otherwise bound as an interest owner.” NCGS §57D-2-30.

This means one important thing right off the bat … any agreement is an operating agreement.  Yes, the verbal agreement, the notes on the back of the napkin, the email dashed off in a hurry … all can constitute some or all of an operating agreement.

So what, you ask?  Well, it matters because that is one way the courts will decide how to rule if you ever have a disagreement and need to split your LLC into smaller parts or close it entirely.  This can be a difficult issue if one of the partners decides to leave and brings out the late night email in which you said he could have 25% of the company.  Well, we know you meant when he complies with certain guidelines or generated the required sales volume.  But, it might be interpreted as his owning that part … right now, without other caveats.

So, if the guideline is that any agreement is the operating agreement, then we really should get that in writing, the way you really meant it, don’t you think?

Now, to review, Operating Agreements (for LLCs) and Bylaws (for Corporations) are the rules by which a business entity operates.  Important provisions in the documents usually describe how members join and how interest is transferred.  That means that you and your other members can decide how ownership and voting percentages are decided, and how members are added, and a host of other details.

Complying with state law is easy … Almost all default state law (“statutory”) provisions can be updated by the agreements.  If you don’t decide about everything, it is ok because the state will have some default rules for you.  We know you will like those because they are written for your best interest.  Wait, maybe you should ask what they are before you agree to that!

Next, we will look at some provisions in the agreements, common ways companies separate, and how the operating agreement could help resolve the split.

In the meantime, if you can’t wait for the next parts, give us a call.  We will be glad to talk to you about your business, and your concerns about your operating agreement (or anything else that you need to talk over with us).

  • ​Part 2 – Breaking up is hard to do …
  • Part 3 – What is my business worth?
  • Part 4 – What do I actually own of my business?  Is it even mine?
  • Part 5 – Who’s next?
  • Part 6 – Protecting your business with an Operating Agreement.

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