Starting a company can seem a daunting challenge and it is common for business founders to wonder what is necessary, and what is not, when starting their company.
An Operating Agreement is a commonly used document with Limited Liability Companies (LLC), and before we look at why this document is important to small business, let’s first look at – What is a small business?
Did you know that a Limited Liability Company can be owned by just one person
The size of a small business can vary but, at present, there are two ways to define a small business:
- The Federal Government defines a small business as one with fewer than 500 employees
- The U.S. Small Business Administration definition of a small business is subject to a set of standards based on specific industries
|Industry||Not to exceed|
|Manufacturing and mining||500 employees|
|Wholesale trade||100 employees|
|Retail and service||$6 million average annual revenue|
|General and heavy construction||$28.5 million average annual revenue|
|Special trade contractors||$12 million average annual revenue|
|Agriculture||$0.75 million average annual revenue|
With these definitions in mind, we can now look at what is an Operating Agreement.
An Operating Agreement is a document used by a limited liability company (LLCs) that outlines the business’ financial and functional decisions including rules, regulations and provisions. The Operating Agreement governs the internal operations.
Once the document is signed by the members of the LLC, it acts as an official contract binding them to its terms. The absence of an Operating Agreement means that a business will be run according to the default rules of the state. Some states legally require that an LLC keep a written Operating Agreement as part of its business documents.
What Can Be Included In An Operating Agreement?
Operating agreement can include many terms but the most common terms that are included are:
- Voting rights and responsibilities
- Powers and duties of members and managers
- Percentage of members’ ownership
- Distribution of profits and losses
- Buyout and buy-sell rules
- Holding meetings
Benefits Of A Operating Agreement
Whilst many states don’t legally require that an LLC have an Operating Agreement there are many reasons why business founders should consider drafting one.
For example, a poorly managed LLC that does not have an Operating Agreement can have its liability protection overturned by the courts, which can hold individuals responsible for debts, injuries, fraud, or corporate mismanagement issues. This is known as “piercing the corporate veil.”
Additionally, many banks and/or investors may request it as proof of ownership of the LLC. A state registration document alone may not be recognized as proof of ownership of an LLC.
Single LLCs and Operating Agreements
The most popular kind of business is a single member LLC, which is an LLC with only one owner. A single LLC Operating Agreement will contain terms similar to that of a multi-member LLC.
There are states that legally require an Operating Agreement for single member LLC’s where they do not require ones for multi-member LLCs, such as Georgia, Illinois and Louisiana.
In the event that a single member LLC expands to add another member the Operating Agreement will need to be redone in accordance with the new change.
Why Do Small Businesses Need An Operating Agreement?
Not every small business will be the same, and there are variations in size, revenue and purpose across every industry and despite this, there are key documents that founders should consider when creating their company.
And whilst not all states require an Operating Agreement, it is generally considered unwise to operate without one in place as the absence of an Operating Agreement can directly impact a LLC’s functionality.
An Operating Agreement is a key document that:
- Protects the business’ limited liability status: An Operating Agreement gives members protection from personal liability to the LLC.
- Clarifies verbal agreements: It is best practice to have the operational conditions and other business arrangements handled in writing to be referred to in the event of any conflict.
- Protects the agreement in the eyes of the state: State default rules govern LLCs without an official operating agreement and because the state default rules are general, it is not advisable to rely on a governing body to manage a company operating agreement
Here at go NDA, we can help you draft an Operating Agreement in no time. With our mobile app and template library, you can execute this crucial document in real time, not only helping you save on legal costs we can help you reduce the waiting time.
At, go NDA, we believe in making legal accessible and affordable so that you can focus on what truly matters – getting your business up and running!
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