One of the best pro tips we give our new start-up and small business formation clients is don’t ignore your LLC operating agreement at the outset.  The operating agreement is actually quite important, especially if there will be more than one “member” (owner) in your LLC.

The operating agreement for an LLC is an extremely important corporate document.  The operating agreement which comes with forms from a download site will not protect you or any partners you may have.  In fact, most people who download corporate forms from a website generally skip the operating agreement altogether and just do the basics to get the company up and going.

Why is The Operating Agreement Important for Any LLC with More than One Owner?

What makes the operating agreement so important for any LLC with more than one owner?  The operating agreement does a lot more than simply identifying the roles of each member, and how profits are to be divided.

The operating agreement for an LLC is a critical corporate document which has several primary functions including:

• Establishing the roles, privileges, voting rights and profit shares of each member
• Anticipating future developments in the lives of the members (such as death, divorce, bankruptcy) and establishing clear procedures for how those development will be handled and how each member’s share will be valued.  It is also important to identify who will have the first right to acquire another’s member’s shares.  One must consider the balance of power and voting percentages as you approach these questions.
• Establish precedence over and effectively neutralize California’s legislative bias toward minority ownership positions
• Protect the personal assets and accounts of all members

Don’t ignore our LLC operating agreement at the outset of business formation, or as the company grows and develops in the coming months and years. The operating agreement for an LLC protects your business in profound ways.  A carefully crafted and executed operating agreement ensures that the business can survive whatever challenges arise down the road.  It facilitates effective relationships between the members who own an interest in the LLC.  It prevents unnecessary disputes and expensive litigation that can take your LLC off course, or ultimately threaten its viability. It can protect each member and prevent being forced out of the company or a hostile takeover.

The Most Common Small Business Dispute is Always About Money

It might surprise you to learn the most common small business dispute is a dispute over money.  Your business attorney from the Watkins Firm has seen it all after more than 40 years of service to the San Diego business and medical / healthcare business communities.

I can tell you, money makes people do strange things.  You think you really know your business partner?  Once the money starts coming in the disputes begin.  It doesn’t matter what you’ve “talked about” or “agreed to” in the past unless it’s in writing.  This is why it is so important to take the time, up front, to go through all of the various clauses and options contained within your LLC operating agreement with your Watkins Firm attorney.

The energy around start-up is always strong and new partners are pulling together with open minds.  It is much easier to discuss these topics and get an enforceable operating agreement in place from the beginning.  Then, when the money starts rolling in the likelihood of a dispute or lawsuit is all but eliminated.  “It says here, in the operating agreement, that we will handle it like this….”

Don’t Ignore Your LLC Operating Agreement During A Small Business Start-up or LLC Formation

Don’t ignore your LLC operating agreement during a small business start-up or LLC formation.  The operating is an important document that establishes the roles and relationships of the parties, voting rights, and money is to be divided among other things.  It should also protect the members from attempts to cut them out of the business and/or primary owners from falling victim to a hostile take over.

We invite you to review our Recent 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.

It is important to understand the implications of each clause and section of the operating agreement for an LLC and which options are best for the company based upon your own unique circumstances.

The Watkins Firm has provided sound advice and counsel to new business owners and existing businesses who are creating a new entity here in San Diego, Southern California across the nation or around the world. Draw upon our more than 40 years of business experience to ensure that your LLC has the strongest opportunity to survive and thrive.