Entrepreneurs and established business owners thrive off forming new ideas and discovering innovative ways of speaking to new markets. Conversely, business law attorneys facilitate and support their goals by creating a solid legal foundation that fosters long-term, sustainable growth. This has to be achieved through diligent planning and sound decision-making. Regarding the foundation of your business, operating agreements clarify how your company will run and offer a significant degree of legal protection.
Before you can appreciate their value, you must understand what operating agreements are, the driving force behind why companies create them, and how they can mitigate future legal issues.
Understanding Operating Agreements
On a broader scale, an operating agreement is a critical document that defines and outlines the internal operations of your limited liability company (LLC). By having an operating agreement, you have a document that lays out your management structure and, by extension, who is responsible for making decisions. Employees should continually ask themselves what they know and who else needs to know it. This can lead to problems being solved on the lowest possible level while they are brought up the chain of command accordingly. It is a roadmap that includes the following:
- Establishes key rights and responsibilities of the LLC’s members
- Defines the role of each member
- Outlines each member’s obligations
- Establishes voting power
Before we segue into the next section, it is essential to highlight that not every state requires an LLC to have an operating agreement. Missouri, for instance, does require one. Illinois is permissive because members may choose to enter into an operating agreement. Simply because something isn’t required doesn’t mean it isn’t beneficial or without merit. For example, even though you can legally own a pet tiger in Delaware, it doesn’t mean it’s safe. In the absence of law, people can decide how much risk they will accept. Without an operating agreement, you are taking on a lot, which we will examine in a moment. Operating agreements provide a clear framework for conducting business and prevent potential disputes among business partners.
Why They Mitigate Risk
People create LLCs to create a barrier between business and personal assets. However, your personal assets could be at risk without an operating agreement. When your attorney creates an operating agreement, they legally separate the two. They will safeguard your personal wealth from any liabilities that the company incurs.
As previously mentioned, operating agreements outline decision-making procedures. Although this sounds ideal, there is a valid reason for having a structure in place. When members do not understand their roles, there could be company-wide confusion about who is in charge. Everyone must know who is responsible and what their scope of power is. An operating agreement addresses key issues such as profit sharing, member contributions, and dispute resolution mechanisms. Conflicts and confusion inhibit progress and prevent traction.
Lastly, change your mindset about them. Instead of seeing them as an obstacle, see them as a tool that allows you to tailor the company through your vision. As an entrepreneur, you can develop and shape several key elements of your business.
- Your rules and regulations
- How profits will be distributed
- The process for admitting new members
- Conversely, exit strategies
Craft an Operating Agreement with Beckemeier LeMoine Law
Operating agreements are vital documents that can serve as the foundation of an LLC. Every entrepreneur needs to mitigate risks and avoid potential issues, which is one tool that can be utilized to that end. With years of experience in business law, Beckemeier LeMoine Law understands the complexities of drafting comprehensive and effective operating agreements. We will listen to your vision and convert it into an operating agreement that protects your interests and supports your business. Contact Beckemeier LeMoine Law to schedule an initial consultation.