For the limited liability company (LLC), the LLC laws do not require this as an officially and legal requirement for LLC formation.  One of the key drivers behind the LLC as an alternate entity was to impose a smaller number of formalities that the legislatures did not feel were absolutely necessary for every legal entity.  Because the LLC is designed to best accommodate single owner businesses or ones with a small number of related shareholders, the states did not feel that an LLC organizational meeting should be legally required 100% of the time.

Having said that, it is a good idea to have one or to have the initial LLC owners prepare and execute what is known as a Written Consent in Lieu of Organizational Meeting.  Why?  First, it is good business planning and the subjects addressed in such a meeting (and approved by the consent) are ones that every business should address at the beginning immediately after an LLC has been formed.

Second, it is a sign that the owners are maintaining the independence and separateness of the LLC from themselves.  This is a key factor if an owner ever gets sued and a lawyer tries to persuade a judge that he or she should be held personally liable for an obligation of the LLC.  We all know that the essence of an LLC is that there is a shield of personal liability granted by an LLC but there is also an argument called “Piercing the LLC Veil” that aggressive lawyers will use to try to get at the owners personally.  By having formal documents as evidence that the LLC has all its required authorizations and is conducting business separate and apart from the owners, those lawyers will have a close to impossible chance of prevailing.

In other words, maintaining regular governance documents (similar to those maintained by a corporation) is a good practice and it should start off with holding and documenting an LLC organizational meeting.

If you would like a form that outlines the approvals and can be customized to be the Written Consent in Lieu of LLC Organizational Meeting, the LLC Expert offers one that you can purchase separately or as part of a Forms set.

The LLC Organizational Meeting form is FORM ONE (click here and scroll down to buy an individual form):

CLICK HERE NOW TO SEE LLC FORMS INCLUDING AN LLC ORGANIZATIONAL MEETING FORM

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• How to Form an LLC (thellcexpert.com)

LLC operating agreements are not filed with the state.  They are private documents that are kept with the official records of an LLC in the the principal business office of that LLC.

After an LLC is formed, the most important next step is for the owners of the LLC to adopt a written LLC operating agreement that everyone agrees to abide by.  This document can be very simple (such as for a single member LLC) but it can also be very complex if necessitated by the ownership or governance structure of a particular LLC company.

Because this document is so integral to the life and the operations of an LLC business, it is recommended you seek the assistance of a competent LLC lawyer when crafting one for your business.  If retaining a lawyer is not feasible or desired, make sure you start off with professionally drafted LLC operating agreement forms.

Click here to learn more about LLC Operating Agreements.

This could not be further from the truth. Having a proper and customized written operating agreement can reduce your chances of being sued or your LLC facing legal disputes by over 60%.

Two of the biggest lawsuit risks that LLC related ventures face include (i) a predatory lawyer trying to get the LLC to be disregarded so that all owners will be personally liable for a lawsuit and disagreements and (ii) problems between members themselves.

In both cases, having a formal written operating agreement will reduce the risk and costs of litigation. The agreement is written evidence that the limited liability company is its own independent entity and provides strong support for maintaining limited liability of its members.

This document also outlines the rights and obligations of the members of the LLC and the voting procedures. Without one, members can later disagree on how the LLC should be run or what rights each member has and without an official document addressing these issues, the only option is expensive negotiations with lawyers or even a lawsuit.

Always have an operating agreement for LLC matters.

The LLC Expert offers state specific form LLC Operating Agreement and a single member LLC Operating Agreement package. These are professional forms that can be used as a starting point for customizing a proper document for your LLC.

The answer to this question is always “YES.”  While the LLC laws of every state may not mandate one in order to have a valid LLC, a limited liability company without an operating agreement is like a country without any laws or regulations.

Without an LLC agreement, the entity may exist but it does not have a personality. There is not one place to show who owns it. . . who can manage it. . . and what it can and cannot do. So, from a practical perspective, an LLC cannot function without an LLC operating agreement.

In addition, it elevates its risk of being disregarded as a separate legal entity in the event of a lawsuit.  What this means is that if you are the owner, you are subjecting yourself to being personally liable for business debts, obligations and problems.  You run the risk of losing the liability protection that an LLC was meant to provide you.

This risk is called piercing the LLC veil and it is something a court of law can do if the LLC owners and managers act as if the legal entity does not exist.  This is another reason, every limited liability company should have a proper operating agreement.

In summary, an LLC operating agreement provides all the fundamental rules and regulations for an LLC business, it reduces the risk of uncertainty and misunderstandings between owners and managers of an LLC, and it buttresses the protection afforded by an LLC.

It is important that you adopt a proper and completed LLC operating agreement for your business.  If your business is complicated such as having more than one class of ownership, having professional investors or having members who are subject to conditions and obligations- you should seek the advice of a lawyer to help you prepare you final document.

On the other hand, if your LLC does not have complication, you can start off with a professional LLC Operating Agreement and use it as a starting point to customize it for your business.

If you are a single member, you can get a professional single member llc operating agreement.  A single member LLC does not require nearly as much procedure in its document, but it is even more important for it to adopt an LLC agreement as single member limited liability companies are subject to a higher risk of veil piercing.

A business has a goal of making a profit and in order to do so, the different stakeholders, whether they be owners, managers, employees, partners or even suppliers, need to know how the LLC business operates and what it is authorized to do. Owners need to have separate evidence of what exactly it owns and what rights and obligations they have to the business.

The Operating Agreement for LLC addresses these matters and once adopted, it is the official governing document and user manual for the entire operations.

One other important point is that one of the largest benefits of a limited liability company is its protection shield for owners. Owners are not personally liable for the business obligations of the LLC as long as it is the LLC and not the owners in their personal capacity running the business.

The best way to provide evidence that it is the LLC running the business is via the operating agreement. This gives the legal entity a personality and a set of governing rules. This establishes the separation. And, this is what will allow you to ensure you are protected if your personal liability were ever challenged in court.

In summary, an operating agreement for LLC provides governance for the entity, clarity and guidance for all stakeholders and protection for owners.

CLICK HERE to Learn More About the LLC Operating Agreement.

MORE RISK OF PERSONAL LIABILITY FOR A SINGLE MEMBER LLC

The same liability protection for multiple-member LLCs is available to single-member companies under the law. The problem is that the single member entity runs a higher challenge risk in a court of law. Many single-member owners have been shocked to find out that they have lost personal liability protection because they failed to operate their LLC entity in the proper way.

Under the law, LLCs must be run by themselves, not the owner personally. Since single owners have no one to answer to, there is a risk that the person who creates an LLC may ignore the legal entity status while actually running the business.

Even if you do run your business properly, aggressive lawyers can work to convince the court that your are running the business personally and not as the LLC itself. Claims of this type are called “piercing the veil”. One way to protect yourself against this kind of claim is by having an operating agreement properly filed. You must also follow the requirements of the operating agreement to ensure your protection.

ESTABLISHING SEPARATION WITH AN OPERATING AGREEMENT

There must be sufficient provisions in the LLC Agreement to ensure the LLC is a separate and distinct entity from the actual operator of the business. Because of this, you must at least include a provision that requires votes of the owners to be taken on major decisions.

The procedures in the operating agreement must be followed by the single member when running the business. You should document your compliance with particular provisions regularly to protect yourself. Proper documentation will help you to show that the owner acts separately and distinctly from the business. This is important, should there be a challenge in court.

COMPLIANCE IS EASY BUT NECESSARY

The paperwork obligations to comply with the operating agreement are not difficult. You can keep up with your paperwork easily by using Written Consent.

A single owner cannot use written consent unless the LLC Operating Agreement has provision for it. Including a Written Consent provision will let you vote and act through an uncomplicated written approval form. Using this kind of form lets you easily meet your obligations to show sufficient independence and maintain the protection against personal liability.

A single member LLC is different from a multi-member company because there is no need to collaborate among owners. So, the same level of checks and balances regarding governance is not required.

However, the risk of personal liability is greater and so having an appropriate operating agreement and knowing what you should do each year to document and prove the separation of owner and business is essential.

If you would like more details on exactly how to do this, visit our site at TheLLCExpert.com which has more articles for the Single Member LLC and offers a Single Member LLC Operating Agreement Package with step by step instructions on how to preserve your protection.

The state legislatures wanted to make forming and operating a limited liability company an easy and straightforward process for small business owners.  As a result, in the LLC Acts of most states, there are no legally required governance documentation requirements that are required to maintain the good standing of an LLC. There may be annual reporting or filings required to be made to the state.

However, LLC governance and LLC paperwork is practically an essential element of an LLC business.  This is because the limited liability company only exists on paper and in accordance with legal laws which are all based on written provisions.  So, in order to determine the personality of the business and, more importantly, its history and processes, such evidence must be in LLC documentation.

Having a complete set of LLC governance paperwork provides the operating history of a business and proof of authorized transactions and business decisions.  This important operational process also wards off potential misunderstandings and disputes among business owners and managers.  Recollections fade as time goes by.  So, you are protecting yourself and your business from potentially expensive he said, she said disputes later by documenting what agreements and decisions are made.

Paperwork and documentation does not have to be complicated and can be done by the business owners or managers for most all routine operational matters.  Visit the LLC Governance section of The LLC Expert for more details on meeting this important requirement for your limited liability company.

The rights and powers of each member to an LLC is defined by the provisions in the LLC Operating Agreement of the particular limited liability company business.  So, the answer to this question will vary widely based on what rules, powers and obligations the members have agreed upon to apply.

Having said that, the most common structure when it comes to LLC decisions is that each member’s voting power is based on his or her relative ownership in the business.  Accordingly, if a member owns more than 50% of the business, this majority member will control the ultimate decision.

Given this, if there are other members who own a significant interest (albeit not a majority), such members can negotiate to require that their vote is required for all major actions or certain, identified business decisions.  This becomes a negotiation between members when they are putting their business together or before a new member is admitted.

One option used is to make the limited liability company a manager managed LLC and to give all significant LLC members a manager position which cannot be taken away as long as that person is a member.  In this structure, a non-majority LLC member gets more power for every day business decisions.  Now, the majority member can reserve significant and strategic decisions for himself by requiring a member vote for these.

Despite the opportunity for negotiation and planning upfront, in most first time business scenarios, members are not aware enough to think through and plan for this and they do not get legal representation to handle this after LLC formation.  As a result, in most cases, default provisions of the LLC laws and in most standard LLC Operating Agreements grant the majority owner final say in the event of a disagreement.

Now, when a member makes a decision on behalf of the LLC, he/she does have certain fiduciary duties to hear out the other members and to make decisions that are reasonably in the best interest of the LLC business.  So, there are some laws that prevent abuse by a majority member.

Unfortunately, the LLC laws of most states do validate oral llc agreements for a limited liability company. So, technically, an oral LLC agreement is valid.

There are some limitations under general contract law.  For example, there is the concept of the statute of frauds which requires that certain agreements be in writing. A recent Delaware court case involved an oral LLC agreement and held it invalid not under the LLC laws but under the statute of frauds/contract rules.

Practically and legally speaking, an oral agreement governing the relationship between LLC members and the operational requirements of a business is just a recipe for disaster.

Just think about it.  If there were ever a dispute or disagreement, then how can one side or the other prove what the actual agreement was between everyone? If it was oral, this means there are no documents or writings summarizing the final disposition.

You should NEVER have an oral LLC agreement.  In fact, I strongly recommend that in your written LLC operating agreement, there be a provision that nothing oral can ever be a part of the LLC governance.  Everything must be in writing.

The LLC agreement for your company provides the fundamental personality, rules and structure of the entire business.  It is like the user manual for your business.  Accordingly, the specific rules, provisions and processes should be spelled out and well documented.

PODCAST:

I recently put together a short audio recording for a group of entrepreneurs that wanted to know if their limited liability company entities needed an LLC Operating Agreement and if so, what this document accomplishes for their LLC busineses.

Listen to this 3 minute recording and you will get these answers and essential information about what you need to properly customize your LLC operating agreement.

Every llc operating agreement should contain a section which outlines what is required before a new member can be admitted to the limited liability company.  These provisions will apply not to the initial members when the business is started, but later on in the event the business wants to bring in a new person as an owner.

The first and most important requirement is to set forth what approvals are required by the existing members. There is no one best answer to this.  Some will want to require that every member approve the new member while others may only require a smaller vote like majority or perhaps something in between (75%).  The right percentage really depends on the circumstances and dynamics of the existing members.  Just make sure every initial member agrees to whatever is finalized for this requirements.

Secondly, the new member section of the LLC operating agreement must require that, as a condition to becoming a member of this LLC, the new member must sign a document, in writing, agreeing to all the terms and conditions of the LLC agreement.  This is very important because one of the biggest areas of dispute and problems with an LLC business is when a member of an LLC is not subject to the same rules and processes as the others.  By having a clear provision making this requirement a condition of any new member admission, you avoid this issue.

Well, the answer to this is because the way the limited liability company laws are set up, a single member LLC is still a separate legal entity from its sole owner.  As a result, it needs to have its own personality and be its own person.

If there is no evidence like a single member LLC agreement and other paperwork, then there is a chance that a judge in a lawsuit may say that the single member LLC was never really honored by the owner as an independent entity running a business.This is bad for a reason:

One of the biggest vulnerabilities of a single member LLC is that someone suing it may argue that the single owner should be personally liable for the liability in question. This is called piercing the protection veil.  While there is not a lot of published case law evidencing when someone has prevailed with this argument, this concept has been well developed in the corporation case law.

Given that corporations have similar asset protection laws, it is a recommended action to see what preserves protection in the corporate arena and apply it to the single member LLC.

The better decision is to have a single member LLC operating agreement and for the single owner to engage in simple governance with his or her LLC to clearly establish that the limited liability company exists and is the separate entity running the business.

The laws are clear that a single member LLC is a good vehicle for asset protection from creditors assuming that the creditor does not require that the member sign a legal agreement agreeing to personally guarantee the liability in question.

The LLC Expert sells a SINGLE MEMBER LLC OPERATING AGREEMENT PACKAGE which includes a single owner specific LLC agreement form and a standard governance consent that can be used to easily maintain written governance approvals for major actions.  This can make the differece between full protection and subjecting yourself to personal liability. Click Here for More details about this package for a Single Member LLC.

There are two ways to update an operating agreement.  This first is with a written amendment.  These are tricky and you should make sure the amendment refers to the underlying limited liability company agreement and has clear language as to what has changed or updated from the old one.  The most important requirement is that the amendment be signed by EVERY member who is a member at the time of the amendment.

The second way to update an LLC agreement is to just replace the old one in its entirety with an updated one that reflects the current status of the LLC. This replacement would be officially called a RESTATED limited liability company agreement and, somewhere close to the beginning of the document, there should be language that states that the document is replacing, in its entirety, the Operating Agreement of [name your LLC], dated {insert date of old agreement].

Lastly, you need to keep all old and current records of any documents that are or were part of the LLC agreement of your limited liability company.  You may need to show which document and/or amendments were in place at different periods of time.

Please get the help of your attorney when first doing these as it is important that you follow the required processes of your LLC, get the necessary votes. and prepare and execute the right documents when updating your limited liability company agreement.

How do you do this?  Just follow these steps and you will take care of this requirement:

1. When you adopt your first limited liability company agreement for your LLC, every person who is a member of the LLC at that time MUST sign the agreement.

2. The agreement for your LLC must include a provision in the section of New Members that a condition for any person becoming a member of the LLC is that such person sign a written agreement agreeing to be bound by all terms of the LLC’s then existing limited liability company agreement.

3. When a person becomes a member of your LLC, make sure he signs a written document that explicitly states that the member agrees to be bound by the terms of the LLC Operating Agreement. Members can sign an amendment to the agreement or a separate document which is known as an Operating Agreement Addendum.  These signed documents get attached to the existing official limited liability company agreement.

There have been many expensive lawsuits dealing with operating agreement that were not signed by every member.  This causes a lot of confusion and issues.  Bottom Line- every person who is a member must sign the actual LLC operating agreement or a document stating that he or she agrees to the terms of the agreement.

The form structure, language and topics covered in a sample operating agreement (form) is very important because this agreement serves as a users manual for the managers and officers of a limited liability company. If you start off with a substandard or improper form, you are only asking for trouble.

I have looked at many form operating agreements available on the Internet and it is obvious that many of them were not drafted by a business attorney who actually practices in this area of business law.  Some use way too much legalese as if they are trying to impress a customer.  Legalese may sound like competency but it does little to help when the business people are trying to figure out how the provisions apply to their business.

Others have no order to the way the important LLC topics are addressed in the agreement.  A well written operating agreement for a limited liability company should have proper articles and sections and each one should have an easy to understand heading.  Again, this will help the users of the agreement to find the information they need when running the LLC business.

I have written a more detailed article on other essential requirements for an Operating Agreement for a Limited Liability Company at www.TheLLCExpert.com

The LLC Expert offers quality forms as a starting point or this is one area where retaining a qualified LLC attorney to prepare this document for your busines is well worth the costs.

This is the one question I will always answer the same regardless of who is asking.  You must always have a written Operating Agreement for an LLC business. There are several reasons for this.

First, having an operating agreement buttresses your liability protection.  It is a solid sign that the LLC is an entity separate and apart from owners which is a necessity to preserve the liability protection shield.

Second, having an operating agreement for an LLC reduces the risk of member disputes.  By having a well written operating manual for the LLC (which is what an operating agreement is in most cases), the members, managers, officers will have certainty when it comes to running the LLC business.

Third, many third parties will insist that the LLC have a written operating agreement,  Make it easier to do business with others (like banks, vendors, service providers, etc.).

Fourth, the operating agreement serves as a users manual or roadmap for operating the business.  The process of creating and customizing one for your LLC business and discussing it with any necessary parties is an effective business planning tool.

The creation of an Operating Agreement for your LLC is one area where getting the advice of an LLC attorney is well worth the cost.

If costs are an issue, consider a legal membership plan where you can at least get a contract review by a business attorney or, at the very least, insist on obtaining a professional operating agreement form drafted by LLC knowledged professionals as a starting point for the do-it-yourself business owner.

The LLC Operating Agreement generally accomplishes two major things but it can be much more.  The two major purposes: (i) evidence the ownership of the limited liability company and the rights and obligations of the members to each other and the LLC; and (ii) impose a governance structure which is a set of rules addressing how the limited liability company will govern itself and operate in a day to day basis.

I.  ESTABLISHING OWNERSHIP AND OWNERSHIP ATTRIBUTES TO MEMBERS

When a limited liability company is formed under state law, in most cases the LLC does not yet have owners (called Members).  The LLC once formed is a separate legal entity but it is pretty much a "shell" entity without any personality.  An important but sometimes overlooked action item of the person(s) who set up the LLC is to actually issue ownership interests in the LLC to the Members.

While an LLC can issue membership interests in several ways depending on the simplicity or complexity of the transaction that brings in a Member, the LLC Operating Agreement should evidence who the Members and and how much they own in the limited liability company.

The typical LLC Operating Agreement will list the members, their addresses and how much they own in the LLC (either by a # of membership units or a percentage interest).  The LLC Operating Agreement will also contain provisions defining what the Members receive in terms of profits for their membership interests and how much voting control each member has.  These matters can be proportionate to the relative ownership of each member or it can be tailored based on the agreements among the members.  The limited liability company gives the opportunity for a lot of flexibility when it comes to ownership rights and obligations of Members.

Other Member related provisions you will find in a typical operating agreement address Admission of a New Member, Transfer of Membership Interests, Special Voting Provisions, and, if the LLC is taxed as a partnership, the rights to tax allocations of income, loss and gain.

One advanced Member issue is dealing with what happens to the limited liability company and the ownership of the LLC in the event there are member disputes, disagreements or deadlock among Members when it comes to voting.  This is such an important area for a multi-member LLC to plan for, but it really requires the advice of a competent attorney who can understand the specifics of a particular situation.  The drafting needs to be tailored and can be complex so these matters are not often not included in a standard operating agreement.  It is an issue to we aware of and plan for.  Many LLC businesses will fail not because of the business itself but because of Member deadlocks and disputes.

II.   ESTABLISHING A GOVERNANCE STRUCTURE

A newly formed limited liability company needs a set of governance rules to follow in order for it to operate.  How does the LLC make decisions?  What is the LLC authorized to do?  Who can act on behalf of the LLC and sign documents or open bank accounts?  These questions are all answered in a typical LLC Operating Agreement.

Generally, a limited liability company can be either member managed or manager managed.  With a member managed LLC, the LLC is governed by its Members.  Each Member has authority to manage and bind the LLC but the Members are subject to rules in the LLC Operating Agreement which govern how they vote and what they can and cannot do. 

With a manager managed, LLC, the Members themselves do not manage the LLC business and operated the day to day affairs.  Instead, they elect persons to be Managers of the limited liability company and the manager operate as a Board (similar to the Board of Directors of a corporation) in making LLC decisions and otherwise managing the LLC business.  A person who is a Member can also be elected as a Manager.  This is very common.  It is important for that person to always be aware and to designated the capacity in which he or she is acting in any specific circumstance.

The LLC Operating Agreement will address other governance matters such as the authorized business activities of the LLC, what LLC actions require special voting, the appointment of officers and their duties, and when the LLC will be dissolved.

III. LLC OPERATING AGREEMENT SHOULD BE SIGNED BY ALL MEMBERS.

Another often overlooked task in a small business limited liability company, is that the Members will forget to actually sign the LLC Operating Agreement or will forget to obtain signatures from all Members.  Without the initial members adopting the LLC Operating Agreement by signing it, the LLC runs a substantial risk that the provisions of the LLC Operating Agreement do not really apply to everyone involved.  This can lead to expensive litigation later.

Always, always always, get the signatures of the initial Members of an LLC to sign the LLC Operating Agreement.  Further, always get the signature of any new Members on an agreement where he/she agrees to be bound by the limited liability company’s then existing  LLC Operating Agreement.