As a business owner, it’s important to know the benefits of an operating agreement for your LLC. You don’t require an LLC to have an operating agreement in most states, but it’s always a good idea to create a formal and written agreement. The agreement is kept with other business records for reference. Here are the benefits of the California LLC operating agreement.
- Maintain control
An operating agreement designates the authority as it defines the manager’s role. It also highlights what will happen if the manager competes with or leaves the company. It is important to hire a manager to take care of the daily business operations,as the business gains momentum. This will enable the owner to shift their attention to businessdevelopment opportunities.
- Separates business and personal identities
For liability purposes, an operating agreement distinguishes the business from the owner. An LLC protects the business assets from a member’s liabilities and a member from business liabilities, which is a major benefit of an LLC. A business may look like a sole proprietorship without an operating agreement in place. One could lose the liability protection an LLC offers if a court doesn’t see your LLC as a separate entity from you. It’s important to note that husband and wife LLCs are considered as ‘single members’ LLCs.
An operating agreement specifies how the future investors will be treated. Businesses that are successful grow and the capital increase comes as a result of the growth. The LLC will be better positioned in the investment negotiations if you structure these terms in the operating agreement.
- Clarifies succession
An operating agreement specifies what will happen if the owner dies, is unable to run the business due to disability, or is incapacitated. This specific provision is important to keep the business in operation and, therefore, it won’t give your family a hard time continuing the business. Many businesses close down when the owner is unable to run, as they were the business life-blood.Flexibility in long-term planning is another benefit that an operating agreement allows, where the business owner(s) states what should happen if they are unable to run the business.
- Avoiding state-imposed default rules
The default rules are overwritten in the LLC’s operating agreement in most state laws, that govern LLCs. An operating agreement in place prevents the LLC from being bound by the default rules of your state.
- Non-member investors
An operating agreement clearly defines who will make the decisions on how the business is run, how the profits and losses will be distributed, and what individual roles will the members have if the LLC has investors that are non-members. It is important to clearly define these terms to prevent disagreements.
The operating agreement enables the LLC to perform its main task, which is to limit liability and puts the owner in the driver’s seat. Having a law office to review the agreement as well as your business is important to ensure that the LLC and the operating agreement are in synchronization.