LLC Operating Agreements – Do I Really Need One?
by Bob Harris
Short Answer: No, BUT –
Long Answer: You SHOULD have one as a roadmap for your business operations and as a reminder of the governance requirements of your home state and the IRS. And an operating agreement is evidence in court that your business is a life all unto its own – separate from your personal life – and separating your business liability from your personal life.
If you think that you can live without an operating agreement, there are those who beg to differ including the folks at the SBA. The private financial information company nerdwallet also recommends an operating agreement for your new venture – and your own personal protection. Just because your business can legally exist without an operating agreement doesn’t make that a good idea in practice, and here’s why.
Now that you have taken the plunge into the world of business ownership, legal and civil adversaries will do what they can to prove that your business is not separate from you. Why would they do that? Because as a start-up, your new business probably has few assets and little money. Legal and civil adversaries are looking for deep pockets, and that could potentially be you, personally.
Having an operating agreement is another layer of protection that says “My business is a distinct operating entity. I keep a separate life from my business.” If you keep proper records of your business activities including the creation of an operating agreement, you will find that courts are less likely to pierce the corporate veil and make you personally liable for errors done in the name of the business.
Operating agreements are the bylaws of your new business. Operating agreements take time to craft and add to the expense of a business start-up. But there are times when a well-crafted operating agreement will add to the enduring nature of your new business.
An older attorney counseled me in my early days as a real estate developer. He explained that there are times that I will grapple with business decisions. He would gladly counsel me as to my choices, but the choices were mine to make. He further explained that there were other times that I will face legal questions. His answers to legal questions were to be prefaced with “read my lips – you must follow the law.” A well-crafted operating agreement can help you, the new businessperson, to discern when the state says “may” (business decisions) and when the state says “shall” (legal requirements) in the operation of your business.
The LLC operating agreements that I draft contain statutory language – the “mays” and “shalls” are spelled out for my clients. When you are struggling with what your state requires of you, you can scroll through your state’s statutes or IRS regulations online. But if you have an operating agreement you can simply refer back to the language that I have drafted for you.
Can An Operating Agreement be Drafted after I Started My LLC?
Operating agreements can always be amended as needed, and therefore can be drafted at any time during the life of your LLC. Generally, you do not need to file your operating agreement with your secretary of state – it is an entirely internal document. On the other hand, your operating agreement should be a permanent part of your Minute Book. Your state may require that you keep a minute book as a permanent record of your LLC meeting minutes and evidence of the ownership changes of your LLC as they occur over time.
I Started This LLC to Shield My Personal Assets from Corporate Liability. Does An Operating Agreement Help Me with Issues of Personal Liability?
Yes, your operating agreement can shield you from corporate liability. If a cause of action is brought against your business, and you do not keep a minute book, and keep it up to date, along with other factors that may be present, a court could determine that LLC is simply your alter ego and not a separate entity.
Appearances are everything. If it appears that you are commingling your life with your LLC, a court may “pierce the corporate veil” and find you personally liable for wrongs committed in the name of your corporation. Having the trappings of a corporation – including your operating agreement, and your adherence to it – will go along way in proving that you are not to be confused with your LLC.
That said, keep your business out of your personal life and vice-versa. Need help with an operating agreement? Call Arthur or Bob at Sayre & Harris Law, PLLC.
Next blog: What goes into an operating agreements and bylaws.
Quit your job? Starting out on your own path? What Now?
When you take that first step as an entrepreneur, the last thing that you want is for trouble to come calling. How you keep trouble at bay is important.
Trouble takes the form of tax liability, personal liability, trademark issues, and more – and they all need to be addressed. Sayre & Harris Law, PLLC, can help you identify the pitfalls of being your own boss, and put you on the path to entrepreneurial peace of mind.
The best first step is to form a business organization. Operating on your own? You can be a:
* Sole Proprietor
* Single Member LLC
* Sub-chapter S corporation
Working with another? You can be a:
Working to create the next Big Thing? You can be a:
* C corporation
If you are like most folks, small is a great way to start. The odds of any new small business waging an effective competitive war with Amazon is slim. Most likely, you may want to start off as a sole proprietor to quickly get things rolling. Here is what you need to be a sole proprietor:
That is the whole list of things that you have to consider, and now you can be off and running. However, the risk of loss in your sole proprietorship is all on you, and that means everything – your automobile, your home, your personal wealth. As a sole proprietor, when something goes wrong, you have pushed all your chips forward. But you ask, what do I have to lose? Everything. Without a corporate entity, you stand to lose everything.
Here is what you need to be a partnership:
Once your partnership is off and running, now the risk of loss is shared between the partners – personally. Now you both stand to lose everything. Consider setting up an LLC or an S corporation.
CORPORATE ENTITY 1: THE LIMITED LIABILITY COMPANY – AN LLC
LLCs in their several variations are meant to shield you from the liabilities that your company incurs. These liabilities can include tax, tort, and trademark liabilities. There are several things that you either must or should do to form an LLC to shield yourself from the costs of things that go wrong:
CORPORATE ENTITY 2 – THE SUB-CHAPTER S CORPORATION
S Corporations are stock corporations with a twist granted by the IRS – all income, losses, deductions, and credits pass through the corporation to the shareholders.
To be an S Corporation you must:
Please note that the IRS does not recognize an LLC per se. If you choose to be an LLC, it will be regarded as a separate entity by the IRS unless you elect how you wish to be classified.
Confused as to where to start your new adventure? Contact Arthur and Bob at Sayre & Harris Law, PLLC. We can get you started on the right road and get you the peace of mind that you need to concentrate on making your adventure a success.
The mission of Sayre & Harris Law, PLLC, is to provide professional and inclusive legal representation to the many diverse communities throughout the Mountain West. Our practice resolves legal challenges in the fields of property, land use, tax lien investing, water, recreation, and estate planning for businesses both small and large as well as individual clients.
Our business philosophy is to provide environmentally responsible solutions to our clients that are both sustainable and economically advantageous.
Our firm will strive at all times to provide excellence in service. We will excel by carefully listening, diligently researching, competently drafting, and vigorously defending our clients’ interests.
The righteous care about justice for the poor, but the wicked have no such concern.
Arthur Sayre, Sayre & Harris Law
Arthur focuses primarily on land, water, and environmental issues from his l m Sayre & Harris location in Denver. After a misspent youth in Texas doing odd jobs like guiding river trips, organizing for doomed political campaigns, teaching wilderness first aid, and land surveying, he moved to Colorado in 2015 to attend the University of Denver Sturm College of Law. He believes in meeting people where they’re at, listening to everyone’s perspective, and finding pragmatic solutions to the legal and everyday problems faced by individuals and communities. Arthur represents clients seeking an environment and sustainability informed perspective on real estate development, agriculture, outdoor recreation, and business development. He also has experience drafting wills and assisting with workers compensation issues.
Robert Harris, Sayre & Harris Law
Bob Harris of the Grand Junction location of Sayre & Harris Law, has over two decades of in-the-trenches experience in real estate, including land development, tax lien investing, funding mortgages, leasing residential and industrial properties, as well as protecting Western land and values through conservation easements. With this background, he is the go-to guy at Sayre & Harris for solutions to real-world real estate problems. Bob knows first-hand that the toughest areas of land use are often political (small p) problems. His approach to land use law is to create winning strategies that will be economically beneficial to the developer and embraced by the community. Bob outfitted adventure tours of the West by bicycle and railroad before he embarked on his real estate career, and he continues to love riding both. His travel through the West’s rugged yet fragile beauty with cycling clients informed a sense of environmental stewardship and personal service that Bob views as critical to ensuring land development is done in a sustainable manner. As an attorney with Sayre & Harris Law, Bob brings the same sense service to his law clients that he had brought to his adventure clients as an outfitter.
For more information or to schedule a free consultation go to www.sayre-harris.law. We look forward to talking with you!
Having an operating agreement is another layer of protection that says “My business is a distinct operating entity. I keep a separate life from my business.”