What is an LLC Operating Agreement?

October 28, 2014 - Posted by: admin - In category:

taxes - No Responses

If you own a business, you may have a limited liability company that serves as the legal entity through which you own and operate such business.  However, let’s just pause here for a moment to verify that you do in fact have a properly formed and currently exiting LLC, corporation, limited partnership or similar corporate entity.  Now and then we come across folks who are running their business in their name and using their personal bank accounts.  This is ABSOLUTE CRAZINESS!!!  If this applies to you or someone you care about, P-L-E-A-S-E get professional assistance right away!

Ok, now that we have that part out of the way, assuming you do have an LLC that has been formed and registered with the State of Utah (or another state), the next item on your checklist is to ensure that your LLC is being taxed in a manner that is consistent with your situation and your overall objectives.  In other words, does it make sense for your LLC to be taxed as a partnership or as a corporation?  Please consult with your accountant to determine the best approach for your circumstances.  Warning, this is NOT a one-size-fits-all answer.  What works for your neighbor might not be right for you and your company.

Next on the items of consideration is whether or not you have a customized operating agreement for your limited liability company. If you and/or your attorney (even perhaps your accountant–though not recommended) formed your LLC online with the State of Utah, you received at that time a very short, bare bones, formation document. This does NOT qualify as an adequate operating agreement.  Why not?  Good question.  Let’s consider below.

What you received from the State of Utah when you formed your LLC simply sets forth the owner(s) of your LLC, the legal name of the entity, the registered agent and a few other important (but still bare-bones) details. One of the reasons why an operating agreement is vitally important for your LLC (and your business operations) is that such an agreement puts “meat on the bones.”  The operating agreement is the “rule book” for your LLC, setting forth, among other things, rules and guidelines for HOW the company is owned and operated, DIVISION of profits and losses, WHEN such allocations and distributions are made, and many, many, many other related and very important details.

The more people that are involved in ownership and executive management of the LLC, the more important it is to have a customized operating agreement.  If your LLC is currently owned only by you and you are the only employee of the company, you might be ok (for now) in not having an operating agreement.  Even so, businesses grow and change very rapidly, and if you think that there is ANY CHANCE for you to turn a profit and expand, at any time in the future, you would be well-served to get your operating agreement in place now, while you are still thinking about it.  Like so many things related to proper planning and prudent business, starting with the correct formation is MUCH safer and MUCH easier than trying to go back later and change (or establish for the first time), the foundation, ground rules and principles that govern the ownership and operations of a business, including an LLC.

One more item to note.  Downloading a “cookie cutter” LLC operating agreement from the internet (or having your accountant or financial advisor do so) is NOT the right approach.  Most people who do this have no idea what they get or what it means.  Following this approach means that you are adopting a set of rules and regulations that will govern how you own and run your business.  While this might sound good at first glance, why would you want to become bound and governed by a set of rules (laws, if you will) that were written by someone else who has no idea about you or your circumstances?  Further, why would you agree to be bound by a set of rules and regulations that you don’t understand and likely don’t even know about?  Sounds crazy, right?  You would be correct on this point.  It is crazy and just plain unwise.

Do yourself a BIG favor–get competent legal assistance to review or initially draft your LLC operating agreement.  You and your fellow owners and managers will be grateful and glad you did, now and in the future.

We are here to help!

P.S.  the concepts and principles noted above regarding LLCs and operating agreements are equally applicable with regard to corporations and their related bylaws and detailed articles.

Ryan L. Jensen
Pharos Law Group, PLLC
Salt Lake and Logan, Utah
855-239-8015 | pharoslaw.com

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