Is an LLC Operating Agreement Necessary?

The short answer is “no” – “but yes”!

If, like in most states, a formal written operating agreement for Limited Liability Companies (LLC’s) is not required by your state, you might quickly decide that having one is not necessary. But if that is your conclusion, we suggest further consideration which, we think, will lead you to agree that something not necessary is, for all intents and purposes, necessary – maybe even absolutely necessary.

So, Why Create an LLC Operating Agreement?

For a solely owned LLC, which can sometimes be run in a way that makes it look more like a sole proprietorship, an operating agreement will help solidify the owner’s limited liability status - no doubt one of the prime reasons for forming an LLC in the first place.

In multiple member LLC’s, an operating agreement can reduce or eliminate future misunderstandings and disputes among members by pre-addressing management and money issues.

But most important, would you rather have your LLC governed by your rules, established by you and set forth in your operating agreement, or have it governed by “default rules” established by your state to cover things that are not set forth in an operating agreement?

Setting your own rules in an LLC operating agreement wins the vote, hands down.

But when it comes down to writing one, we may question the highly touted and generally agreed upon “simplicity and ease” of forming and operating an LLC. That may well be accurate down the road - but initially there’s still work to be done.

Producing a well prepared LLC operating agreement really can’t be called “simple and easy”. Corporations have many of the questions regarding their structure and operation answered for them in their state’s laws. But LLC’s enjoy much more flexibility. And this flexibility, though unquestionably a great advantage, increases the initial complexity of forming an LLC. That’s because LLC members themselves are left to determine, and include in their operating agreement, many things that state laws have predetermined for corporations.

Even though this process does involve more time and effort, it is worth doing right. We think you will agree that even an operating agreement that does no more than preclude future misunderstandings and possible conflict among LLC members would command a high price.

Next, read about some of the more important issues an LLC operating agreement should address here >>

I’d like to see more information about LLC’s >>

I’m ready to start the formation of my Limited Liability Company (LLC) now >>