Why should you pay attention to your operating agreement in an LLC?  What does this document govern and why should you be concerned about getting it right up front and updating it regularly?

The Operating Agreement Defines How the Company Will be Run

The LLC operating agreement is one of the most important documents in your San Diego LLC.  The protections of the corporate veil established by the operating agreement protect the personal funds and assets of the members from any debts or liabilities associated with the company.  It also establishes the responsibilities of the business owners, how the business will be managed, how money will be accounted for and disbursed, while ensuring that your company will survive all of the major events that may arise in the life of its members.

How much is each member going to contribute to the company?  Will this be in the form of money or service?  What portion of the profits will be reinvested in the company and what portion will be disbursed?  How will that be calculated?  How often will the members meet and what are the voting rights of each member?  Will there be a minimum number of members required to take a vote on important issues?  What happens when something happens in the life of a member or if they wish to sell their interest and/or leave the LLC?

Most form download sites provide a generic operating agreement that does not effectively handle the core issues involved with a Limited Liability Company.  If you are in the process of forming an LLC, or are in business and have questions about what makes an operating agreement important we invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

Why is it Important to Pay Attention to Your Operating Agreement in an LLC

Why is it important to pay attention to your operating agreement in an LLC?  Many new business owners are eager to get into business and just fill out required state forms, download a package of corporate documents and jump into business.

Pro-Tip: “After more than 40 years of services as a business attorney here in San Diego I can tell you this: A boilerplate operating agreement guarantees lawsuits in the future.  It’s not a matter of “if,” it’s a matter of when.  Do you expect to turn a profit?  If so, the operating agreement must establish the rules and processes for how money is to be handled.  The failure to do so will lead to an expensive and destructive dispute between the members of your LLC in the future.

We work through the document with you to make sure you understand the dozens and dozens of separate clauses and how or if they apply to your unique scenario.  It is important to take to the time to work through all of the questions associated with the operating agreement while the company is young, and while all of the members (owners) involved are excited and working together.  I can also tell you, after decades of experience with companies and LLCs here in San Diego, it is much less expensive and much easier from an emotional and business focus point of view, to answer these questions and develop a strong agreement now, than in the midst of litigation.” – Dan Watkins, Founding Partner

Unproductive disputes and ultimately litigation is what happens when an operating agreement is not thorough or complete.  This isn’t a simple disagreement.  Disputes between members of an LLC involve contentious, expensive litigation that threatens the very survival of the company itself.

What makes an operating agreement important for your LLC is that it works all of those issues out ahead of time.  There aren’t arguments (or expensive litigation) down the road.  A well crafted LLC operating agreement  and provides a clear process to establish valuation for a member’s interest, and how the company (and other members) can protect the integrity of the company while dealing fairly with the interest of the member that is experiencing a challenge such as divorce, personal bankruptcy or even the death of one of the owners.  This is one of the most important things you will do in the life of an LLC, and we want to help to ensure that your company survives all of the unexpected bumps along the way, and thrives.