Operating Agreements: What You Need to Know

What is an operating agreement and why is it crucial for business entities such as LLCs and PLLCs?

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Independent healthcare practice owners and other business owners don’t want to risk their personal assets when things go wrong in the business. To protect against this potential outcome, many form a limited liability company (LLC) or, if your state offers it, a professional limited liability company (PLLC).

Typically, forming an LLC involves a pre-organization agreement, articles of organization, resolutions, and an operating agreement. Together, these documents establish a legal entity that can perform specific services, enter contracts, and be sued in a limited capacity.

What is an operating agreement?

Generally, an operating agreement is a contract that LLC members adopt unanimously to govern just about any aspect of the business. Separate and distinct from the articles of organization (the documents that get filed with the state), it outlines the functions of the organization and its members. For example, an operating agreement may include rules for managing the business, the powers granted to specific members, the distribution of business revenues, and how the business will use and obtain assets. 

Importantly, operating agreements are living documents that one can amend as needed. Indeed, operating agreements must accommodate growth, changes in management, relocation, and other duties the LLC may seek to adjust. Thus, LLC resolutions document such changes and bind the LLC to the new operating agreement once the members approve the changes.

Why should I have an operating agreement?

Absent an operating agreement, existing state law governs the rules for an LLC’s internal affairs. Unfortunately, these state laws may be inconvenient and inflexible and don’t always align with the intention of the members of the LLC. However, a valid operating agreement will often override the state’s default rules regarding the internal affairs of the LLC, allowing the members to dictate, draft, and approve rules encompassing virtually all aspects of the business and giving them near-complete autonomy over the process. 

Moreover, as one of several corporate formalities, operating agreements aid in cementing and supporting the establishment of limited liability, affirming that the LLC is a separate entity from the individual members. Additionally, lenders may require an operating agreement before approving an LLC’s loan, and banks sometimes require LLCs to provide their operating agreements to open an account. Overall, an operating agreement is a useful tool for the LLC to wield when engaging in contracts.

Get legal support.

While an operating agreement grants members of an LLC much freedom in structuring the terms, it’s essential to understand the limits. Therefore, it’s critical to seek a knowledgeable attorney to guide you through the process, identify your needs, and implement a robust operating agreement that helps you accomplish your organization’s goals.

Whether you are at the earliest stages of business formation or own a mature business that needs to bring your corporate documents up to date, the experienced business attorneys at Jackson LLP are well-suited to create an operating agreement as unique as your business. If you are in one of our licensed states, schedule a free consultation to determine if we fit your needs.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader and should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

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