Does my Limited Liability Company really need an Operating Agreement?

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In order to be a viable Nevada Limited Liability Company (LLC) you need only file Articles of Organization with the Nevada Secretary of State. However, if there is more than one owner of the LLC, running your business without an Operating Agreement (OA) is like lying naked by your pool for the whole month of July without sunscreen. You are going to get hurt; ill; you may die; and you will surely regret it.

A limited liability company is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

An OA sets forth the rights and responsibilities of the members (owners) of the LLC as well as the rights and responsibilities of the managers (operators) of the LLC. You can view it as a road map for your business. Who is going to do what? Who can bind the company? One of the best features of a LLC is the ability to make disproportionate distributions (someone who puts in less cash can receive greater distributions if s/he contributes greater sweat equity). Such unique financial arrangements can only be effectuated if the LLC has an OA.

When the LLC is formed (or at any time thereafter), the members can create an OA to anticipate what happens in the event of one of the member’s death or incapacity. In the event that there is a dispute among the owners of the LLC, an OA is the functional equivalent of a prenuptial agreement. It will set forth how one member can buy out another member’s interest; how disputes are resolved; how the LLC can continue to operate even if the members are at loggerheads; and how the assets of the LLC can be distributed among the members in the event that the LLC is dissolved.

Your OA should be specifically tailored to your LLC. This is not an agreement where one size fits all. Just as with that person lying naked in the sun throughout July, you will want to make sure that you have the proper coverage for your business in all the right places.

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