Yes, Your LLC Needs an Operating Agreement
I sometimes have new clients come into my office having already formed their own limited liability company by visiting the Indiana Secretary of State’s web site. All it takes is a credit card and about ten or 15 minutes to create your own articles of organization, the first of two governing documents for an LLC and analogous to a corporation’s articles of incorporation and, presto!, you have an LLC. However, many of those clients have not bothered with the second organizational document, called an operating agreement, which is analogous to a corporation’s bylaws. Technically, the law does not require LLCs to have operating agreements, at least in Indiana. Even so, my advice for those clients is invariably, “You need an operating agreement.”
It’s generally easy for clients to understand why an operating agreement is a good idea if the LLC has two or more owners (or “members”). For example, an operating agreement can establish how much of the LLC each of them owns, both in terms of economic ownership and voting rights.
But if there is only one member, why does she need to agree with herself that she owns 100% of the LLC? Obviously, she doesn’t, but there are other reasons to have an operating agreement. Perhaps most importantly, having an operating agreement can help protect the member from becoming liable for the LLC’s obligations. An operating agreement is also a good way to document certain tax decisions, which can be useful in applying for loans. In addition, if the articles of organization are also properly written, a sole member can use the operating agreement to provide for continued management of the business if she becomes unable to manage it herself.