When you have more than one Member in your Massachusetts Limited Liability Company, having an Operating Agreement is almost a must. Called an “LLC Agreement” in some states, an Operating Agreement is a formal legal document that sets forth the rights and duties of Members and Managers, including financial issues and working relations. But what about when you are the only Member? Isn’t this just an agreement with yourself? Why would you need it?
You might get away with not having an Operating Agreement if you are the sole Member of the LLC, but you should strongly consider having one. Consider these “pros” for doing so:
An Operating Agreement helps to establish that the Limited Liability Company is separate from the owner, helping to avoid any risk of having personal liability.
Operating Agreements set out procedures for record-keeping and distributions, which can provide clarity to the Member and Manager of the LLC on how to act in certain situations.
The Operating Agreement can set out a succession plan in case the owner dies or becomes incapacitated, so your family has an easier time knowing how to run the business. This could also help with estate planning.
An Operating Agreement can set out the procedures for admitting additional Members.
If you have a separate Manager, the Operating Agreement can guide the operation of the business.
Operating Agreements can avoid having your LLC governed by state default LLC and business rules.
Many third-parties such as insurance companies, title companies, and banks may demand to see an Operating Agreement before doing business with you.
Presenting an Operating Agreement to investors/lenders can give them an idea of your business plan to make them more willing to provide you with the necessary financing.
The biggest “con” to having an Operating Agreement is the cost. You want it done right, by a lawyer who knows what he or she is doing. You might be reluctant to spend money on legal fees that could go to operations or supplies or more material things. Some other potential cons:
Having an Operating Agreement in place dictating procedures can limit the flexibility of LLC owners somewhat, since you may not have complete autonomy in any scenario.
If your Operating Agreement is poorly drafted and not a fit for your business or industry, it could create more problems than it solves. A “standard” Operating Agreement free from the Internet is worth every penny that you paid for it.
There could be some problems with self-dealing in the creation of the Operating Agreement since you are negotiating an organizing document with yourself, but this is unlikely.
In summary, the pros outweigh the cons, as long as you do it right.
Adam P. Whitney, Esq. 617.338.7000, [email protected]
Brandon J. Sloane (J.D. Candidate – 2020, Boston College Law School)
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