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The role of operating agreements in managing LLCs

For most small businesses in southern California, the preferred form of business organization is the limited liability company. Limited liability companies are easy to organize and can be operated free from much of the formal procedures that are required of business corporations. Unfortunately, when forming a business, many small businessmen fail to plan for unexpected bumps in the future. No two people can be expected to agree on every aspect of managing a business, and if a business has three or more principals, the probability of conflict becomes higher.

A properly drafted operating agreement can go a long way to obviating destructive disputes that can threaten the very existence of a business. California law states that operating agreements govern relations among members of the LLC, the rights and duties of managers, conduct of the LLC’s business and the means for amending the agreement. The statute also enumerates other subjects that can be included in an operating agreement.

Perhaps the most important role of an operating agreement is defining the relations among the members and investors. For example, an operating agreement can specify how each member must vote his or her shares on various issues, including admitting new members and selling company assets. Business law contains many different mechanisms for resolving disputes, ranging from mediation to mandatory buy-out of a member’s interest, and an operating agreement can include one or more such procedures to guard against fatal deadlock.

The internet is rife with “fill-in-the-blank” operating agreements, but using these forms can be risky. For a business of any size, the better practice is to consult an experienced business attorney. Seeking the advice of a knowledgeable lawyer concerning the provisions of an operating agreement will go a long way to ensuring that the agreement addresses the unique needs of the business and of its members.

Source: California Corporations Code, Section 17701.10, accessed on Jan. 11, 2016