Having a Love Affair Without Protection?
Business owners may feel they are “married to their business,” but many jump into business without any legal protection. In fact, even default state laws can be extremely risky.
Enter the Operating Agreement (or Company Agreement), the legal protection–essentially a private contract. It controls your LLC’s operations and acts as a legal buffer between the owners, operators and the company. While most states don’t require an LLC to have an operating agreement, it’s always a prudent business decision to create a formal one in writing – even for a single-member LLC. Here’s why:
- WHAT RULES?
In Texas, whenever you hang out a shingle without proper legal frameworks, you’re subject to the default rules, a.k.a. the statutes promulgated by the state legislature. Those laws are no strangers to change and may prove unfavorable for all involved, if relied upon. Take heart! Most states allow these default rules to be overridden by the LLC’s Operating Agreement.
- MAINTAIN CONTROL
As your business grows, you might hire a manager to run the daily operations so you can buy back your time and shift your focus elsewhere. You may even give your manager ownership interest (or an equity stake), opening you up to further risk. A well-drafted Operating Agreement mitigates risk by defining the roles & responsibilities for all involved. It can designate authority, boundaries, compensation, and duties, including provisions should an officer/manager leave or compete with your company.
- SEPARATE IDENTITIES
Without an Operating Agreement (& a solid legal framework), the LLC may look like a sole proprietorship. If the Court doesn’t recognize your LLC as a separate entity from yourself, you could easily lose the protection it’s meant to establish. An Operating Agreement distinguishes a business from the owner, creating separation between the business and the individual. Like any good relationship, this goes two ways: the LLC protects its members from the business’s liabilities, and the business assets from a member’s personal liabilities.
- SCALABILITY
Successful businesses grow, as does their need for capital. An Operating Agreement can define how future investors (or additional members) will be treated by the company. If you structure these terms effectively, the company will be better positioned for negotiations with potential investors.
- MOVING ON
However you look at it, all good things must come to an end… including your relationship with your business. Without clarifying legal provisions and mutual understanding of what happens upon a triggering event (death, disability, divorce, disagreement, departure or distress), your successor may face difficulties dealing with the management or transfer of ownership of the company. It’s always best to pass the baton cleanly and voluntarily.
Let’s Continue This Conversation . . .
It’s safe to say an Operating Agreement serves an important role, even for a single-member LLC. It puts you in the driver’s seat and enables the LLC to perform its main tasks: limiting liability and protecting your assets. It can create prudent firewalls between the liabilities of the owner from the business, and vice versa. Weygandt Law would be honored to assist with your entity and its needs, including the creation of a comprehensive Operating Agreement (or the review of an existing one to ensure you are fully protected and that your company’s current operations and ownership structure is aligned). To get the ball rolling, call our office at 713-489-5900. Mention this article for $250 off a private & confidential framework session (our strategy session for existing business owners).
Creating a new legal entity or reviving a business enterprise? Visit freeLLCfiling.com for more information on how we file LLCs for FREE! Or, RSVP to our Business Planning 101 Wisdom Workshop, Wriskey Business (wrenchbusiness.com), where we’ll discuss the Wrenches of Liability and walk through the 7 Legal Building Blocks to help weatherproof your business walls.
