Is it essential that your business have a written operating agreement?

You’ve just started your company, likely a limited liability company (LLC) and you’ve decided to forego committing to a written operating agreement because you and your partners are harmonious and the business outlook is great. This is more often than not the reason business partners do not insist on implementing a written operating agreement. For any business to be successful, long-term, it is essential that your business have an operating agreement in place to govern the business during those good times and bad.

When you first start a LLC, the Louisiana Secretary of State requires that you file a document titled articles of organization. These articles give the business its life. However, many businesses list their purpose as “for any legal purpose allowable”. What the articles usually contemplate is a written operating agreement.

What is an Operating Agreement?

The Louisiana Revised Statutes define an operating agreement as meaning any agreement, either written or oral, of the members which memorializes the affairs of the limited liability company and the conduct of the business. An operating agreement can clearly delineate which situations call for votes, who manages the LLC, and what to do in the case of deadlock between the members. Most importantly, the operating agreement usually defines ownership interest and powers of managers and members.

What items should be addressed in an operating agreement?

The purpose of the operating agreement is to govern the affairs of the business. Thus, the operating agreement should list all members of the business and their membership interest. In addition, the following items, at a minimum, should be addressed in your operating agreement:

1. Principal Office of place of business;

2. Appointment of Manager(s);

3. Capital contributions;

4. Restrictions on Transfer of Membership Interest of Assignability thereof;

5. Agreement on capital calls or how the business is to raise money during those financially tough times;

6. Profits and Loss Distributions;

7. Meetings;

8. How to address voting issues;

9. Management of the Business;

10. Dissolution (when the business decides to close its doors);

11. Accounting; and

12. Divorce.

Why is an Operating Agreement Important?

A written operating agreement provides rules and boundaries for its members and provides certainty on how to handle specific scenarios. A written operating agreement will prevent misunderstandings amongst the members by setting clear roles and responsibilities. An operating agreement can also stipulate what happens in the event that a member dies or gets divorced. The most common advantage gained from an operating agreement is the ability to quickly resolve disagreements amongst the members.