Are you starting an LLC and unsure if your operating agreement covers everything it should?
You’re not alone.
While it might be tempting to draft an operating agreement on your own or use a template, it’s important to understand the risks involved. A poorly drafted agreement can leave your LLC vulnerable to disputes, compliance issues, and financial losses.
An operating agreement is a legal document that establishes the rights and responsibilities of each LLC member.
Operating agreements cover details such as:
- How decisions are made
- When meetings are held
- How members are admitted to the company’s board
Overall, you can rely on an operating agreement to outline your business's administrative processes and management details.
Working with an operating agreement lawyer can help each member clarify their role within the limited liability company. The lawyer will work with the members to draft a document that wholly reflects their shared vision and responsibilities.
Here is an article that defines an operating agreement in business.
Operating Agreement Template
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What Does a Lawyer for an Operating Agreement Do?
A lawyer for an operating agreement writes legal documents for their clients. In addition, they draft operating agreements for different types of LLCs in various industries.
When hiring a lawyer for an operating agreement, consider their experience and familiarity with contract law.
The lawyer will work with you and your partners to identify the key roles and processes to outline in your operating agreement. The lawyer can also mediate negotiations to ensure everyone is fully satisfied with the terms and conditions in the document.
As you work with a lawyer for an operating agreement, they will gather information about your business and compile those details into a necessary format. Then, they will ask you and your members a series of questions that will help them determine the most important information about your company.
Part of the lawyer’s process for drafting an LLC operating agreement includes the following:
- Determining ownership percentages among each member.
- Gathering each member’s contact information, including their legal names, addresses, phone numbers, and titles within the company.
- Compiling information about each member’s rights, responsibilities, and duties in the company.
- Incorporating details such as hourly or annual compensation, daily duties, performance metrics, and voting rights.
- Creating a plan of dissolution and an outline of each member’s responsibilities and duties in the event of a dissolution.
- Incorporating a severability clause that helps protect members if any portion of the agreement is found to disagree with federal, state, or local laws.
- Clarifying buying and selling rules for all organization members under various circumstances, i.e., death, termination, or resignation.
All the details that the lawyer collects will help bolster the legal protection of your operating agreement. If disputes, lawsuits, or other issues ever arise, the operating agreement will be an invaluable asset as you work toward resolution.
Here is an article with ContractsCounsel’s guide to operating agreements.
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Common Mistakes When Drafting an Operating Agreement Without a Lawyer
Drafting an operating agreement might seem straightforward, but without professional guidance, it’s easy to make mistakes that could have significant consequences for your business. Here are some of the most common pitfalls entrepreneurs face when trying to create an operating agreement on their own:
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Insufficient Detail in Ownership Structures
Many business owners overlook the importance of clearly defining ownership percentages and roles within the LLC. Without precise terms outlining how profits and losses are distributed, who holds decision-making power, and how contributions are valued, disputes can arise. For example, what happens if one member feels their share of profits doesn’t reflect their investment or effort? Without clarity, these issues can escalate into costly legal battles. A lawyer ensures every ownership detail is clearly defined, minimizing the risk of disputes down the line.
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Failure to Outline
Dispute Resolution
Mechanisms
Disagreements are inevitable in business, but not all operating agreements include effective dispute resolution methods. If there is no procedure in place for handling conflicts—such as mediation, arbitration, or majority voting—the LLC may face gridlock, which can halt business operations. A well-crafted operating agreement prepared by a lawyer will include provisions for resolving conflicts quickly and efficiently, helping the business avoid costly and time-consuming litigation.
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Overlooking State-Specific Regulations
LLC laws vary from state to state, and failing to align your operating agreement with the specific requirements of your state can render parts of it unenforceable. For example, some states mandate the inclusion of specific clauses related to member withdrawals or dissolution procedures. Missing these details could result in complications or even legal disputes if a member decides to leave or if the business dissolves. An experienced lawyer is familiar with state regulations and ensures that your agreement complies with local requirements.
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Lack of Flexibility for Future Changes
Business needs evolve, but DIY operating agreements often lack the flexibility to adapt to future changes, such as adding new members, modifying profit-sharing ratios, or expanding business activities. Without proper legal language allowing amendments, you may find yourself stuck with outdated terms that don’t reflect your current business model. A lawyer helps draft an agreement that accommodates future growth and changes, making it easier to adapt as your business expands.
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Inadequate Protection of
Intellectual Property
and Business Interests
Entrepreneurs often assume that intellectual property (IP) protection and confidentiality clauses are not necessary in an operating agreement. However, if you’re sharing proprietary information or developing products under the LLC, these protections are crucial. A lawyer can include clauses that safeguard your business’s IP and ensure that any members exiting the business cannot use confidential information against the company.
Why Templates Aren’t Enough for Your Operating Agreement
Many business owners are tempted to use online templates for their operating agreements, thinking they offer a quick and cost-effective solution. While templates may seem convenient, they often fall short in providing the level of detail and customization that your business truly needs. Here’s why relying on a template could leave your business exposed to unnecessary risks:
- Lack of Specificity: Templates are designed as one-size-fits-all solutions, which means they rarely account for the unique needs of your specific business. They often lack vital clauses that may be necessary depending on your industry, ownership structure, or business goals. For example, a template may not provide clear guidelines on profit-sharing ratios for members contributing different amounts of capital or effort. Without tailored language that reflects your business’s specific circumstances, you risk disagreements and legal disputes that could have been avoided.
- State Compliance Issues: LLC laws and regulations vary significantly by state, and templates typically don’t account for these differences. What’s legally acceptable in one state may not comply with the requirements of another. Using a generic template could result in an operating agreement that is partially or entirely unenforceable in your state. This is especially problematic for businesses operating across state lines or considering expanding into new markets. A lawyer ensures your operating agreement aligns with your state’s regulations, keeping your business compliant and legally protected.
- Missed Opportunities for Protection: Templates often lack the comprehensive protections that a business might need as it grows. For instance, a template might not include provisions related to intellectual property rights, confidentiality agreements, or effective dispute resolution methods. Without these safeguards, your business could be left vulnerable to internal conflicts, loss of proprietary information, or even lawsuits. A lawyer can identify these potential risks and draft clauses that proactively protect your business’s assets, ensuring your operating agreement evolves alongside your company’s needs.
How an Operating Agreement Protects Your Business’s Future
A well-drafted operating agreement is more than just a formality; it’s a crucial safeguard for your business’s future. As your company grows or changes, having a comprehensive agreement ensures stability and protection in the long term.
- Preventing Member Disputes: One of the primary functions of an operating agreement is to set clear decision-making processes and conflict resolution mechanisms. By outlining how major decisions are made, who holds voting power, and what steps to take when disagreements arise, the agreement helps maintain harmony among members. A lawyer ensures these provisions are clear and enforceable, reducing the risk of costly and disruptive disputes.
- Facilitating Business Expansion: Businesses evolve, and your operating agreement should be flexible enough to accommodate those changes. Whether you’re bringing in new members, adjusting ownership shares, or expanding into new markets, a robust agreement can be designed to adapt without needing a complete overhaul. Legal expertise ensures that your agreement includes provisions that allow for seamless transitions, saving time and avoiding legal complications as your business grows.
- Protecting Against External Threats: Beyond internal operations, an operating agreement also shields your business from external risks. By outlining proper procedures for compliance, safeguarding assets, and addressing potential legal threats like lawsuits, a well-prepared agreement acts as a buffer against unexpected challenges. A lawyer’s guidance ensures these protections are in place, giving you peace of mind knowing your business is secure.
How Much Does an Operating Agreement Cost?
The average LLC operating agreement cost on the ContractsCounsel’s legal marketplace is $850.
Lawyers set their rates, and those with more experience or shorter timeframes will often charge more for their services.
You can request a free quote from vetted attorneys in your state to draft your operating agreement on ContractsCounsel.
If you decide to work with a lawyer to write your operating agreement, you should first discuss your plans with other members of the LLC. When you belong to a limited liability company, your percentage of ownership may vary. Each member’s rights can also differ based on what portion of the company they own.
Anyone in a limited liability company can divide ownership however they want. For example, the founder of the LLC may wish to retain majority ownership, even if they sign a joint operating agreement with a business partner.
Here is an article that outlines the average cost of an LLC operating agreement.
Key Terms in an Operating Agreement
The key terms of an operating agreement are important elements that protect each member’s rights as an owner of the LLC. Understanding these key terms can make negotiations more accessible while ensuring the document offers complete legal protection.
Here are the essential parts of an operating agreement you should know.
- Ownership amounts. Each member’s limited liability company ownership should be written as a percentage amount, e.g., Person A owns 30%.
- Responsibilities. Establish each member’s responsibilities and any shared responsibilities members have to the company.
- Voting rights. List each member’s voting rights and how their voting power is divided.
- Profit and loss allocations. List each member’s profits and losses, and describe the distribution among the LLC’s members.
- Rules for holding meetings and taking votes. Explain what processes must occur for members to hold a meeting with the other members and what steps they must take to vote.
- Administrative processes. Outline which members are responsible for administrative processes and how these processes are to be handled. If other members must assume these responsibilities due to a member’s death, disability, termination, or resignation, how will they do so?
- Dispute resolution. Describe a mutually agreed upon method of resolving disputes among the LLC members.
- Severability clause. A severability clause protects members of a company if any part of their operating agreement is found to violate the law.
- Buyout or sellout provisions. List what steps a member must take if they want to sell their share of the company and what happens to their shares if they pass away.
- Articles of organization. Articles of organization are also known as a certificate or formation. These documents are included to support the validity of the LLC that the operating agreement pertains to.
- Certificate of organization. The founding parties of any limited liability company must submit a certificate of organization to their state’s secretary upon forming their organization. This certificate officiates a business as a legitimate legal entity.
Here is an article with a guide on writing an operating agreement, including key components.
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Do I Need a Lawyer for an Operating Agreement?
You may benefit from hiring a lawyer for an operating agreement. Business contracts can be lengthy and complex and must follow specific federal and state guidelines to be valid.
If you sign an operating agreement that omits certain clauses, it could be null and void. In the event of litigation, this would make your LLC partnership illegitimate and your contract unenforceable.
Consulting with a lawyer for an operating agreement also grants you access to their inside knowledge and expertise.
Lawyers working with small businesses are consequently well-versed in business law and best practices. As a result, they can ensure that your limited liability company agreement covers every process and includes provisions that protect each member’s rights.
While you can use an operating agreement template online to draft your LLC agreement, it may be best to submit it to a lawyer for professional review. Attorneys can tell you whether an operating agreement would be legally enforceable in court.
Don’t Risk Your Business’s Future with a DIY Agreement
Operating agreements are essential for protecting your business, but trying to draft one without professional guidance can lead to serious issues. From compliance failures to ownership disputes, the risks are significant. By consulting with an experienced lawyer, you ensure that your operating agreement is comprehensive, compliant, and tailored to your specific business needs. Don’t leave your business’s success to chance—reach out to a legal professional today and get the peace of mind that comes with a properly structured agreement.
Here is an article with an example of an operating agreement.
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