As estate planning professionals who have helped many clients who own their own businesses, we’ve been involved with more than our fair share of Limited Liability Companies (LLC). The LLC continues to be one of the most popular ways for entrepreneurs to organize their companies, as it provides an affordable and more manageable way for many small business owners to limit their liability and separate their personal assets from their business interests. For many of these entrepreneurs, however, there often seems to be one important document that gets neglected: the operating agreement. Here are six reasons that should help to demonstrate why you need an LLC operating agreement for your small business.
Nobody Lives Forever
Though we all like to think that we’ll live forever, that’s simply not the case. And when an LLC member dies, that death can create major complications for the surviving members. Often, death can create situations in which a decedent’s family members suddenly want to be more involved in the business – something that can be extremely disruptive for the surviving LLC members. Sometimes, those heirs expect that the remaining members will buy their loved one’s shares in the company. This can create tremendous problems and even threaten the company’s survival.
The Agreement Secures Liability Limitations
Did you know your LLC won’t automatically separate your personal assets from those of the company? In fact, without organizing principles and operational standards, you could intermingle your company and personal assets in a way that destroys the liability protection that your LLC should provide. There have been many instances in which courts have declared that an LLC could not provide liability protection, simply because the owner failed to maintain that separation between his and the business’ assets.
Your LLC operating agreement can provide solid guidelines that help to instruct everyone in the company about how accounts and assets should be managed. The existence of formal rules can, when those rules are followed, help to ensure that the LLC is viewed as an entity separate from its owner. With those rules, you can more easily avoid any intermingling of assets that might weaken the liability shield that your LLC is supposed to provide.
You Should Avoid Statutory Defaults
If you’ve reviewed the statutory defaults for the state, then chances are you’ve noticed that they’re not exactly customized to meet your company’s specific needs. In those statutes, you’ll often see the words “unless otherwise provided in a written operating agreement” included in the language of the law. Those words are a reminder that the only way to avoid operating in accordance with the exact terms of those statutes is to have an operating agreement that provides other instructions.
In most instances, your operating agreement will contain standards that are somewhat close to those seen in the statutes. However, there are bound to be subtle differences that could cause problems for your company if you are forced to rely on the default statutory language. The better option is to create an operating agreement that can include provisions like those contained in those statutory rules, but deviate from them in a way that reflects your company’s unique needs.
Your Agreement Can Help Ensure Growth
Your company isn’t going to grow by accident. In fact, if statistics teach us anything, they teach us that the odds are against your company experiencing any real growth. Here’s the good news, though: an operating agreement can provide you with the clear and sober plan you need to give your business the best chance to grow and prosper. When it’s created properly, you can ensure that you have a roadmap for success that can help to see you through a wide variety of challenges and conflicts.
An Agreement Sets Expectations
How you establish a benchmark for expectations matters. Without some sort of objective standard of measurement, it can be difficult to know what to expect with any business venture. Without an operating agreement, it can even be difficult to know how things are supposed to be managed. Take accounting, for example. Who will take care of the task, and which accounting method do you want them to use? Or consider dispute resolution. Who arbitrates conflicts? Who has the ultimate say in how those disputes get resolved? Without an operating agreement providing these answers, you could end up just making it up as you go along.
It Defines Entry and Exit Strategies
When your LLC has more than one member, there can often be disputes about how new members can be added, or how current members exit. Most commonly, these disputes are the result of questions about how profits and losses are to be distributed among the members, and how voting rights are enforced. You can help to resolve many of these questions in advance by including terms in your operating agreement that detail the standard practices your group intends to use in these instances.
A Buy-sell agreement can also be used to provide even more guidance about withdrawals. It can set the terms for any buyout of a member’s interests in the LLC by identifying when and how members can buy out one another’s share of the company. The buy-sell agreement can also be helpful in determining the price paid during any such buyout. By including a buy-sell agreement, you’ll be providing your company and your loved ones with greater peach of mind.
Contact the Experts
An LLC operating agreement can also benefit your overall estate planning strategy in ways that you might expect. When your company has greater stability, and provides you with the liability protection you need to keep personal interests separate from your business concerns, those protections can provide greater stability for your estate planning efforts as well. At Frank & Kraft, Attorneys at Law, our business and estate planning experts can help you to ensure that your LLC has the protections it needs to provide maximum benefits to your life goals. If you’d like to learn more about how we can help you with your broader business planning goals, give us a call at (317) 684-1100 or contact us at our website today.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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