Why LLC Operating Agreements Protect You and Your Business

Forming a limited liability company, or “LLC,” does not require an attorney. Articles of organization are filed with the Secretary of State and the LLC is then created; no attorney necessary. However, while registration with the Secretary of State is all that is necessary before an LLC can legally operate, in reality, no LLC should be without an operating agreement drafted by an attorney. An operating agreement dictates how the LLC will be governed and provides the terms of the relationship among the governing members. Crucially, the operating agreement also names the owners, their respective percent of ownership and how much they each contribute to start the LLC.

Admittedly, at the start of a new business, the business owners are looking for every avenue to save costs. Hiring an attorney to draft an operating agreement may seem like an unnecessary expense when there is no cash flow yet and the business partners have known each other for years. However, the decision to forego an operating agreement because you trust your partners is penny wise and pound foolish.

Several months or even years after the LLC is formed and the business started, issues often arise among business partners who have known each other for years. For example, there may be confusion about each partner’s responsibilities, each partner’s exact ownership of the LLC, or about each partner’s respective investments (especially when partners invest differing amounts). Without an operating agreement governing these issues in writing, the partners may have to resort to litigation to resolve their issues and recoup their investments. Litigation is costly and time consuming and can threaten the underlying business. But litigation, and the uncertainty that leads to it, can be avoided from the outset by hiring an attorney to draft an operating agreement that reflects the business partners’ particular needs in managing their LLC. This small investment can provide long-term stability to the business and head off disputes among partners before they occur. For more information about this issue or other business matters, please contact Attorney Joshua J. Butera at 401-824-5100 or email jbutera@pldolaw.com.

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