Why Do You Need an Operating Agreement?

Posted By : Aubrey Mead , on Aug, 2015

 

Running a business in today’s world is becoming increasingly complex every day, and this causes many businesses to attempt to cut out procedures that aren’t necessary. Many business operators today believe that the less complex a company is, the easier it will be to run. Additionally, if it’s easier to run the business, you might just be more successful.

All of this is certainly true; however, every business owner has to be careful not to cut out procedures that are actually important, even if they don’t seem necessary at the start. Does your small business need to write up an operating agreement, or is this procedure just an unnecessary step that will slow you down? For many small businesses, the answer may at first seem to be that you do not need to have one, and it’s usually true that it’s not a legal requirement. However, there are a couple of reasons why such a document is absolutely crucial.

Protection from Creditors

As a small business, you’ll probably be interested in doing anything you can to protect yourself from creditors. Small business tend not to have a lot of capital on hand for handling these issues, and an operating agreement can help to protect you in these situations. In the eyes of many courts, this agreement will help to show that the small business is running on its own and that its funds are used only for business purposes. This is especially helpful when the business does not have employees but is run entirely by one person. In this scenario, the courts are more likely to respect business assets and personal assets as being entirely separate, thus protecting the business owner’s personal assets from the creditors.

Protection from Employees or Other Owners

Many times, people go into business together with a great working relationship founded on trust. In time, though, these relationships can deteriorate. With that in mind, if you’re starting a business with a partner, you may assume that certain verbal agreements will be enough to keep you and your partner happy. Unfortunately, that may not be the case, and you could end up in a very difficult situation with a partner. An operating agreement can help to quell many potential disagreements before they even begin. A well-drafted document will define things such as ownership percentage, rules, and management, and can thus prevent you from necessarily finding yourself in trouble over these kinds of matters. If questions about ownership percentage come up, for example, all you have to do is refer to the document as a legally binding agreement. In essence, these documents can offer real protection to the business and to you personally. Having such a document written up may seem like a hassle, but it’s well worth it for the time and expense it could save you down the road.

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