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The importance of a business operating agreement

On Behalf of | Dec 22, 2021 | Business Law

An operating agreement is essentially a contract between business members outlining how the business will be run. Having an operating agreement is not required for Pennsylvania businesses; however, having one is still strongly encouraged to avoid internal conflicts and keep the business running smoothly.

For a limited liability company, or LLC, an operating agreement is particularly useful because the agreement helps protects business owners from personal liability. Rather than business owners or members being liable, the LLC takes on most of the liability for taxes and other debts.

If an LLC does not have an operating agreement, state default rules control some aspects of the business. These rules may not be in the best interest of the LLC or the owners. However, the terms of an operating agreement can supersede the state default rules, giving the owners a better chance to protect themselves and their business. An operating agreement is also a good idea for common sense reasons such as avoiding confusion about how the business is meant to be run.

What information goes in an operating agreement?

Each business’ operating agreement is unique, containing terms applying only to that business. However, there are usually terms pertaining to:

  • Duties of business members
  • Each member’s share of business ownership
  • Rules related to the buying or selling of the business
  • Profit and loss distribution

Information on the protocol for meetings or other events is also commonly found in an operating agreement, as well as the procedures to be followed in the event of a dispute.

An operating agreement is a private document meant to be viewed only by business members. It is not required to be filed with any court or agency and should be kept in a confidential place.

Whether you’re already a business owner, or looking to start a business, an operating agreement that shields you from personal liability and increases your business’s chance of success is extremely effective. A legal professional can help with drafting an agreement or answering questions.