Do I Need an Operating Agreement For My Multi-Member LLC (Hint: Yes, You Do!)

Many people form limited liability companies (LLCs) to own and operate their businesses.

Much like corporations, LLCs offer limited liability protection without the requisite formalities of a corporation (for example, a board of directors, annual meetings, etc.).

The Operating Agreement is the primary document of an LLC, as it describes the framework of the business; financial and operational processes, including governing the internal operations of the business, including the relationship between the members (owners) and the duties of the owners to the business.  Essentially, it is the blueprint of the LLC.

Despite the importance of this document, I would guess that the vast majority of people who form an LLC do not bother drafting an Operating Agreement.

This is a dangerous thing to do (or, more appropriate, not do).

Every LLC needs an Operating Agreement.

Many multi-member LLCs (LLCs with more than one owner) don’t have Operating Agreements because the members believe that they can ‘figure things out as they go along’ or ‘wing it.’  Essentially, they don’t want to spend the money to have the document drafted.

Then, something inevitably happens.

One member does one of the following:  takes money from the LLC without authority, changes the locks to the business and locks out the other member, or forms another LLC to which they divert company business.

When prospective clients call me with such issues, I ask what the pertinent Operating Agreement provisions say regarding these matters.  The frequent answer is “we don’t have an Operating Agreement.” When I ask why, the frequent answer is “we didn’t think it was worth the money.”

Guess what?  It was. Because now, to fix these issues, will cost a multiple of what it would have initially cost to draft the necessary documents.  Whatever price they initially balked at to draft the Operating Agreement will seem cheap compared to what it will now cost to fix things.

I completely understand the need for a new business to save money.  My best advice is to do so by skimping on unnecessary business expenses.  Find a less- expensive supplier, cut back on unnecessary perks, turn off the lights when you go home at night.  However, I don’t believe that cutting costs by not drafting necessary LLC documents is a legitimate way to save money.  Should an issue occur (and it is likely inevitable that it will), the future cost to remedy the issue will far exceed the present cost of the documents.

If you are forming an LLC or thinking of forming an LLC, having an attorney available to review or draft your LLC documents will help to avoid conflicts and other problems down the road. Contact the Greenbaum Law Firm, P.A. to schedule a consultation today.

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Greenbaum Law Firm, P.A.

The Greenbaum Law Firm, P.A. is a boutique, client-centric law firm concentrating in the areas of business and corporate law, contracts and agreements, and real estate. Our unique approach to the practice of law consists of positioning our clients at the center of the legal practice and pursuing their objectives in the most efficient and transparent manner.

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