Why do you need an operating agreement for an LLC? An operating agreement is not required by law in Illinois, but you’re doing yourself a disservice not having one. They’re important for banking and financial transactions. They set up a roadmap for avoiding problems and for handling ones that do arise, and they help keep good relationships between owners good.
How do they help with money? Often banks will require an operating agreement in order to open a business bank account for the LLC.. Banks will almost always require an operating agreement when the LLC is taking out any kind of loan. If you ever sell the LLC, the buyer will want to see the operating agreement so they know they’re dealing with the correct representatives of the business with authority to do the transaction.
This goes when someone is wanting to join the LLC as a member as well. They’re going to want to see who the right people to deal with are, and they’re going to want to see that everything is in order as it should be.
So how do operating agreements help prevent problems with operating the LLC? A good LLC operating agreement is a good plan. It will address things like:
- what kinds of decisions need to be voted on;
- what kind of vote is needed to approve certain things – maybe taking out a loan needs a simple majority or two thirds vote, whereas bringing on a new member requires a unanimous vote;
- how to handle tied votes;
- what to do when an owner wants to leave the business, dies, is incapacitated, or the other owners want to kick them out;
- how and when to bring in additional owners;
- what rights investors have;
- which role is generally responsible for which duties;
- how profits and losses will be shared;
- how things will be handled if the business must close; and
- more.
A good operating agreement will set forth how to handle all those things and more so there is an easy roadmap for LLC members to follow and not end up lost in disagreements and hard feelings.
So, you’re spouses, best friends, et cetera, you don’t think problems like that will happen for you. It would be wonderful if that turned out to be true. Statistics, though, show that good relationships and intentions at the beginning aren’t enough, and that it doesn’t take much for them to turn sour.
I’ve personally handled cases where former best friends were at each other’s throats when one decided to end their LLC, and their operating agreement was something they got off the internet that didn’t have any provisions for ending the LLC. It took months to resolve, each side paid a tremendous amount in attorney’s fees to come to a settlement agreement, and the friendship was permanently destroyed.
I had another case where siblings running a long time family business ganged up on another sibling and kicked her out of the family business so they can implement some shady business practices. The entire family was ripped apart, with members of the family taking sides. That damage was permanent, and again, it took months to resolve, and the only ones who came out ahead were the attorneys who got paid to negotiate a settlement.
An operating agreement may seem like an expensive investment when starting an LLC, especially if you’ve already been running the business without one and without trouble.
Statistics show only 25 percent of businesses last for more than 15 years. Even those that have lasted that long have their fair share of unexpected problems. It’s not a smart gamble to go without an operating agreement to handle those problems or to help if you’re not in that 25%. And a good operating agreement can help you be in that 25 percent who survive.
It’s true, a good operating agreement is not cheap. The cost of not having one, though, can be exponentially higher, both in actual cost and the cost of once good relationships that turn permanently sour.
