Being a business owner comes decision after decision. When it comes to how your business operates, you will also have to decide whether or not your business should have an operating agreement. While operating agreements are not required in every state, they do help protect your business, as well as provide some structure as to how your business runs and functions from day-to-day. Keep reading to learn more about if your business should have an operating agreement in place.
You may be asking, “What is an operating agreement?” Well, an operating agreement is a legal document that spells out exactly how your business runs, what duties each member in charge has, the rights members have, liabilities, and the obligations each member has as part of the ownership team of a business. As we mentioned above, not every state requires an operating agreement for LLCs (Limited Liability Companies). However, it is likely in your best interest to have an operating agreement in place. Here is why.
1- More Protection for Your Limited Liability Company
Having a formal, legal operating agreement in place can help you in the long run if you run into a situation in court. Without one, you jeopardize your company’s liability, having it seem as if you are running a sole proprietorship or partnership (SBA).
2- No “One Size Fits All” Structure
In states where an operating agreement is not required, you may have to follow the state’s rules for LLCs if you do not put an operating agreement in place. Typically, these rules are “one size fits all,” meaning you have to follow what the state considers the best action plan for businesses. If you want your business to be authentic and unique, an operating agreement can help you achieve this.
3- Prevent Your Members from Competing
By including an operating agreement in the establishment of your business, you can prevent your company’s members from competing with your company. Without this, if your employees or team members decide to one day leave your company, they can leave and create the same type of business as you and end up competing with you. An easy way to prevent this is by including a non-compete (non-competition clause) in your operating agreement.
As a business owner, you want to do everything right to ensure your business will be successful and at the top of the industry. Including an operating agreement is not required as a business owner by all states, but it is definitely recommended to ensure order, structure, and ultimately to protect your LLC. If you would like to go over the best practices for your business, including more information on Operating Agreements, give us a call! We would love to help you get your business on top. Visit https://www.cawealth.com/business-owners.html to get started, or give us a call at 858-707-7739 (San Diego) or 714-332-2910 (Brea).