Whilst not required, Operating Agreements present a serious opportunity for small business owners to benefit from

  • Operating agreements are legal documents that contain stipulations on how one’s LLC is to be run; it contains directives concerning all aspects of business
  • Whilst not a necessary step in the formation of an LLC (like the Articles of Organisation), they can extremely beneficial – particularly to small businesses
  • Operating Agreements add an extra layer of legitimacy to LLCs that can act as a protection of their limited liability status
  • Additionally, it can portray smaller businesses as a more trustworthy debtor to lending companies

Basics of Operating Agreements

Entrepreneurs in search of a structure for their business that provides more protection but isn’t overly formal, need to consider restructuring their business as a limited liability company (LLC). Regardless of how your business is currently structured, there are several key steps involved in an LLC formation that involve some paperwork, one of which is the creation of an operating agreement.

An operating agreement is a document recognised in law that stipulates how you intend your LLC to be run; it often contains directives concerning how to make business decisions, the allocation of money, and dispute resolution. Operating agreements are key to LLCs because it acts as a binding outline of the business’s financial and functional decisions for its members. 

Once members of an LLC sign it, it acts as a contract in binding them to its stipulations with reference to the manner in which the business’s operations shall be managed, in the manner the owner sees fit. Effectively, operating agreements act as a governor of the relationship between an LLCs members, making it imperative for those with greater than two members. 

Why Your Small Business Needs One

The first and paramount benefit of operating agreements for small businesses is the protection of limited liability status it provides. If an LLC has a written operating agreement, it gives the organisation more credibility to assert that it is not just a pretext for avoiding liability. This safeguards against situations in which an LLC might lose its liability protection  if it doesn’t appear to be a legitimate business entity that is distinct from an individual.

A second benefit of an operating agreement is that the extra legitimacy it provides businesses with can help convince lending companies to extend them loans. Whilst loans are necessary for almost any business to cover their expenses, they can be vital for small businesses to help them get off the ground and gain traction.

The final primary benefit of operating agreements is that they present an opportunity to override your state’s default rules for LLCs, without one – businesses of this structure will be governed solely by the procedures of its state. In order to run your business exempt from some of these rules, an operating agreement is required.

How To Make One

Whilst the thought of adding yet another document to the pile of paperwork might seem daunting, it is actually much simpler than you might imagine to produce an operating agreement. The easiest option involves hiring a lawyer to draft it up for you, though this can be costly and time-consuming.

Small businesses might decide they would prefer to draft it themselves, in which case there are many templates to model theirs after, or go beyond if they decide they require something more catered to their needs.

Concluding Statement

Whilst not a compulsory step in the process of forming an LLC corporation, it is highly recommended that small business owners consider creating their own operating agreement as it presents a myriad of benefits. The extra legitimacy they provide LLCs with enables them to better protect their liability status and even a greater chance of securing funding when applying for loans.