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.

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.

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.