When creating a company, you may be tempted to go for a less expensive option without some of the “bells and whistles” offered in a more expensive corporate package. One of these perceived “extra” items may be an operating agreement. However, an operating agreement is not a superfluous document. An operating agreement is like the bylaws in a corporation. An operating agreement is an important part of an entity structure for three reasons:

1) It helps to ensure courts respect personal liability protection. To be effective, one must show that the entity is separate from the individual. Having an operating agreement and abiding by its rules is one way that an entity can show this separation.

2) It sets the structure and operating rules of your entity. It may spell out how profits will be split, how major business decisions are made, and procedures to be followed for changes relating to members, avoiding misunderstandings and disputes in the future.

3) Operating agreements allow customization of the rules of the entity to the satisfaction of the members rather than being governed by the default rules of the state, which may not be to your benefit or may not take into account the unique structure of your business.

It is impossible to foresee all of the issues your company may face down the road. Spending a little more money upfront for an operating agreement may save you a lot of money and headache in the end.

This information is made available by Spaulding Law for educational purposes only and not to provide legal advice. By using this website, you understand that there is no attorney-client relationship between you and Spaulding Law, unless you have entered into a separate representation agreement. This information should not be used as a substitute for competent legal advice from a licensed professional attorney.