Operating Agreements and Recent State Law Changes

What is an operating agreement?

Like corporate bylaws or a partnership agreement, an operating agreement spells out an LLC’s operating rules and the rights and duties of its managers. It can address everything from how the LLC is managed to how key business decisions are made and the procedure for transferring ownership interests.

Why do LLCs need one?

States typically don’t mandate that every LLC adopt a written operating agreement. But, if none exists or if it doesn’t cover every essential area of a business, then the one-size-fits-all provisions of a state’s LLC law kick in, controlling a business’ structure and operations, including the percentage of ownership, voting rights and the distribution of profits and losses.

Business owners should be wary even if they agree with their state’s LLC law, because those regulations are constantly changing. Consider these updates during the past few years to default provisions across the country:

·         Alabama made changes to its LLC statutes that require LLCs to have an operating agreement — written, oral or implied. That means that if no written agreement exists, courts can infer members’ wishes simply from their actions.

·         In California, a recent amendment to its LLC law says that decisions made outside the usual course of business must have unanimous approval from all members. LLCs can avoid this rule with a written operating agreement that lays out the power of each of the managers.

·         In New Jersey, when members resign, they no longer have the right to receive fair value of the membership interest. With the appropriate provision in a written operating agreement, members who resign can cash out the membership interest.

Are they really necessary for single-member LLCs?

You might not have any members to argue with, but as a single-member LLC you should sign a written operating agreement. A state’s default LLC statutes will still apply to you if your business doesn’t have one. What’s more, you could lose out on the main benefit of an LLC: limited liability protection. Having a written operating agreement is an indication that the LLC is separate from its sole owner. If a court does not think the LLC is being treated as a separate entity it could consider your business a sole proprietorship, which means you face losing personal assets in a business dispute.


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