If you have recently formed an LLC for your business, or have taken over an existing LLC, the next step is to create an operating agreement. Sometimes called a Company Agreement or an LLC Agreement, the Operating Agreement details how your company will run.

By creating an Operating Agreement, you can create flexible business structures, rather than funneling your company through the default rules and structures set by state statute. The Operating Agreement allows the LLC members to customize how profits and losses are split amongst members, restrictions on the transfer of ownership interests, methods for paying business taxes, and signatories for business accounts.

The Operating Agreement may also help maintain the limited liability features of an LLC by clearly creating processes and procedures for the company. If evidence shows that LLC is not sufficiently separate from the members, then the veil of limited liability can be pierced, and members can be held liable for the LLC’s obligations. Evidence that an LLC follows their Operating Agreement has supported the recognition of the limited liability of its members in past lawsuits, even when there is only one member.

The Operating Agreement makes for better business partnerships by identifying how decisions will be made. These clauses can determine who has the power to make decisions, whether there are tie-breaking powers, or whether a third-party or an alternative dispute resolution provider can be used.

The Operating Agreement can limit when and how ownership interests can transfer. This includes buy/sell provisions in the event that a co-owner wants to sell their ownership, and also what happens in the event of a member’s death, divorce, bankruptcy, or breach of the operating agreement.

Finally, other institutions may require an Operating Agreement. While it isn’t a requirement in Washington State to create or file an Operating Agreement, some banks, insurers, or investors may require an Operating Agreement before deciding whether to work with your company.

Contact me today for a consultation about your business needs.