Skip to main content

An Award-Winning, Women-Owned & Operated Law Firm

Why Does an Operating Agreement Matter?

By: Sophia Chase Munson

1. The operating agreement is the document that lays out the governance and succession of the business.

The operating agreement is the document that lays out the governance and succession of the business. This means that it explains when and under what circumstances meetings can be held, the rights and responsibilities of the business owners and managers, appropriate limitations of liability, procedures for the addition of a new business partner, procedures for the departure of a business partner, and when and how a business should be ended. It may also include provisions like intellectual property protections, confidentiality restrictions, and non-compete or non-solicitation requirements.

2. This agreement is a plan of business operations.

Many small business owners find that putting together the operating agreement helps them identify questions they had not even thought to ask about before beginning business, such as how the business will be managed between partners; how the business interacts with their estate plan; and how business interests may be bought and sold. The operating agreement states how the business is going to be run, so a court (or a bank, or an investor, or the government…) know what to expect. LLC owners should also actually follow the terms of the operating agreement (that means not printing it out and sticking it in a desk drawer for ten years!).

3. Operating Agreements serve as proof that an LLC is truly acting as a separate business in the case of a lawsuit.

When an individual or individuals set up an LLC, they are doing so to create a separate entity—separate from themselves personally—through which to conduct business. They generally do this to try to limit access to their personal assets, so that if a third party sues them because of a business issue, the third party cannot reach that business owner’s personal funds and home.

However, to prove that an LLC is truly acting as a separate business in the case of a lawsuit, a court requires proof that the LLC is not simply a thinly veiled attempt by the business owner to claim protection that he or she is not entitled to. This is why it is very important that you treat your business as a business, not just an informal convenience. A business should have a business plan and a succession plan, because that is how successful and organized business is conducted.

4. An operating agreement is a vital document for the court, for investors, for any banks requiring a loan, and to receive certification from the government for any kind of small business certification, amongst many other things!

Many clients come to us with form operating agreements printed from the internet, which they do not understand and have not been followed. These are not effective. We recommend consulting with attorneys who are experienced working with these documents, and know how to craft a document that will actually reflect your business practices.

* * *

#businessformation #operatingagreement #governance

There when & how
you need us most

Providing peace of mind through personal and prompt service as we help you navigate legal matters.

Schedule a consultation

Read about our client experiences

Firm News & Legal Updates


Cost Saving Tips for Mediation

Read Article

3 Geller Law Group Attorneys Ranked as Super Lawyers

Read Article

Attorney Advertising

The information contained in this website is provided to users for informational purposes only and does not constitute legal advice, nor is the transmission or receipt of such information intended to create an attorney-client relationship between any Geller Law Group member and the user. Prior results do not guarantee a similar outcome. As legal advice must be tailored to the specific circumstances of each client and case, and laws are constantly changing, nothing provided herein should be used as a substitute for the advice of retained legal counsel. Your continued use of this website constitutes your acceptance of this disclaimer and acknowledgement that under no circumstances shall The Geller Law Group be liable for any direct, indirect, special, consequential or any other damages arising out of or in any way connected with use of this website.