3 Mistakes You Can Make While Creating an LLC Operating Agreement

As an entrepreneur, you must have been thrilled to start a new Limited Liability Company (LLC) with your partner. In all that excitement, it is possible to overlook certain stringent formalities necessary for generating revenue.

For example, an LLC operating agreement will be a backbone for the company’s processes. This is a legal requirement in certain states and an essential tool in an LLC partnership.

Therefore, inaccuracies in this document may lead to several legal or financial impacts on your company. That is why you must avoid the mistakes listed below.

#1. Failure to Draft a Coherent Agreement

According to Forbes Advisor, only states like New York, California, Missouri, Delaware, and Maine legally require an LLC operating agreement. Hence, co-founders in other states often refrain from drafting them.

Besides, companies frequently copy-paste templates from the internet to get them done quickly. However, this can affect their business and have legal consequences. Why? Because the agreement is not personalized to the LLC’s requirements and stature.

Besides, a copy-pasted operating agreement does not incorporate state laws. That is why you must write a coherent agreement with appropriately documented company procedures. At the same time, you should not skip essential sections for convenience.

For example, if you envision a future where the business partner never leaves, you will avoid adding a section about members. However, you might regret that later.

#2. Not Having a Plan of Action for When a Partner Leaves

What happens if one partner wants to leave an LLC, and you need a proper strategy for that process? Disagreements are common between business partners, but the whole company gets affected if one decides to leave.

According to Thienel Law, an LLC partnership might end when one of the partners wants to retire or has filed for a bankruptcy case. Moreover, they might also leave due to illegal activities, or they might want to dissolve the partnership. Irrespective of the reason, you should have a successful separation agreement before this happens.

Having a well-drafted agreement clearly defines the partner’s contributions, authority, and duties. Besides, it should also feature the separation terms regarding management structure.

It will ensure a smooth transfer and take care of asset management. Some businesses also take the help of a licensed attorney from law firms like Thienel Law when such situations arise.

In fact, Tom G., their client for 20 years, says that this law firm is 100% client-focused and always approaches a solution thoroughly and accurately.

#3. Loopholes, Stagnation, and Ambiguity

In some instances, business owners create ambiguous sections so that they can change them in the future. Due to these, there can be legal loopholes because of misinterpretation, doubt, and uncertainty.

Did you know improper information in an LLC operating agreement can lead to potential exploitations? That is why you should always reliably define the company’s intentions. This way, the loopholes can never be used against you.

You must be careful and keep changing the agreement as the business grows. Ideally, you should revisit this document once every year for a revamp session to avoid stagnation.

Other than this, unclear language and missing sections will also hinder the clarity and aim of the business. You should avoid using vague terms that complicate divisions about business conduct, decision-making, and more.

What Should an LLC Operating Agreement Include?

The U.S. Small Business Administration suggests LLCs operate with a written agreement, regardless of state laws.

Ideally, your operating agreement should outline ownership stakes, duties, etc. Besides, the founding members need to sign the agreement for it to become a legal document.

There is no single formula or rule that you should follow while drafting the key components. However, here are some important sections that you should address in this written notice:

• The LLC’s organizational structure, operational requirements, and business partnership details.
• Documentation of how company assets and money get distributed in this partnership agreement.
• Information about management rights and details about active decision-making roles.
• Details about contributors, capital investments, and funding to address how money is raised.
• Process of changing the partnership agreement when one partner leaves or new members are brought in.

Other than these, the agreement should also chronicle the “dissolution plan” for the company. Including all these components in your operating agreement will protect the business’s liability status.

It will also textualize any oral agreements leading to a proper structure for your organizational growth. In short, there will be clarity about the company’s intent.

The Curious Case of Postnup vs. LLC Agreement

In a recent divorce case, something funny happened.

The husband (party A) owns 99% of an LLC, whereas his children own 1%. According to the postnuptial agreement, party A should transfer his portion to his wife (party B). However, the LLC operating agreement states that transfer is prohibited without discretionary consent.

Therefore, the agreement made the postnup null and void during the legal hearing. That is the power of an LLC operating agreement.

The Bottom Line

To put it all together, an operating agreement is crucial for any LLC. However, mistakes can lead to legal or financial repercussions. You must create a coherent agreement that documents your company processes.

Once done, the next important thing is to document a plan of action when a partner leaves. It is also crucial not to have any stagnation, ambiguity, or loopholes in the agreement.

Moreover, ensure the document contains information about organization structure, company assets, management rights, contributors, etc. This way, your LLC will be destined for success.