31 Reasons Why Your LLC Needs an Operating Agreement

Print This Page
OAHow about 31 reasons to maximize the liability shield of your Limited Liability Company? They apply to every business, professional practice, and investment entity which holds stocks, real estate and anything else in the name of an LLC.

First, though, here’s why you want to consider these 31 reasons.

There’s no protective goo which coats your assets when you (or you and your business associates) pay the $100 filing fee to the Secretary of State to form an LLC on your own. There’s no automatic, unlimited, lifetime protection.

And there’s no sealant which seeps into all the cracks and crevices surrounding company assets when you use an online service’s  Do-It-Yourself Limited Liability Company Special for $89-or-whatever. That’s true even if their package includes a fill-in-the-blanks form “Operating Agreement.”

Sure, merely forming an LLC gives you some protection. But regardless of what you’ve read about LLCs online, regardless of what you found by Googling, that’s not all the protection you can get.

You get much more protection  – and control – with a real, written Operating Agreement tailored to what you’re doing.

That’s primarily due to the 31 places in the Georgia LLC Code where this phrase appears:

Unless otherwise provided in a written operating agreement. . . [.]”

Translation: you can put just about any useful control, decision-making, or financial power in place for your LLC as long as it’s written out in your Operating Agreement.

If nothing’s in writing  – usually because nobody insisted on an Operating Agreement or there’s a canned one – then you’re stuck with what the law provides as the “default” results.

This is no abstract problem. Each “default” is rigid. Here’s an example.

Imagine a supermarket which is owned by two couples. Each husband owns 25% and each wife owns 25%.  One of the husbands dies. The widow is his executor.  There’s no Operating Agreement.

The widow now faces being outvoted, because her husband’s estate is no longer a member of the LLC. By law, unless otherwise provided in a written Operating Agreement, his estate is now an “assignee.”   And assignees don’t vote.  Assignees do get the dead owner’s proportionate financial benefit. But the assignee has no say-so in business affairs.

Fast forward to the end of that year. The supermarket’s coffers hold profits.  The three voting members — the widow and the other couple — sit down to discuss what to do with those profits.

But there aren’t four votes.  Only three: the widow, the other husband and the other wife.  The dead husband’s estate has no vote.

If they simply divided up the profits, each family will get half. The assignee still gets the 25% financial benefit.

However, the other couple really wants to put a new roof on the building, update the neon signs to LEDs, and buy new freezers.  The widow doesn’t care about any of the improvements; she’d rather have the money.

Of course, the other couple will prevail, because with their votes, they can do what they want. 2 to 1.  And after they spend for what they want, there may be little left to split up four ways.  Or maybe they’ll be nothing.

{By the way, saying “Oh no, we would never do that” is a well-meaning sentiment that will almost definitely evaporate.)

How could that have been prevented? If the two couples had an Operating Agreement that provided what was to happen.  Because they didn’t, the widow found herself in the default position.

And it’s the same default if an LLC member is incapacitated, unless you have provisions in the Operating Agreement to let his or her legal representative stay a voting member.

Other things in the 31 Reasons:

What about if a majority of the members want to end the LLC, or merge it, or sell its assets? A majority can’t do any of that because you have to have a unanimous vote . . . “unless otherwise provided in an Operating Agreement.”  

Or what if an assignee wants to become a full member? It will take the unanimous vote of the other members if nothing is “otherwise provided in an Operating Agreement.”

Sure, written Operating Agreements are boring. But they work.

Accordingly, if you’re in an LLC, or are planning on it, do yourself and the other owners  a favor: get the really good protection we’re writing about.  Don’t get stuck with an “otherwise provided” mess.