Why an Updated Operating Agreement is Important for Your LLC

Limited Liability Company (LLC) has become one of the most popular business entity types for solo and small business owners. It is considered to be more flexible than a corporation and has the advantage of combining the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation, creating the best of both worlds for business owners.

Once an LLC is created by filing the Articles of Organization with the Secretary of State, an LLC operating agreement should be created. Missouri statute requires that all limited liability companies have an operating agreement. However, it is not filed with the Secretary of State or any other government agency. Each business entity must create and maintain this important document themselves.

When a business owner decides to file their LLC on their own, also creating a thorough operating agreement is the step that is most often overlooked.

The LLC operating agreement is an internal document outlining how the business operates. It describes what happens when disputes arise between members, how membership interests can be transferred, who runs the business, and even what happens if a member goes bankrupt, gets divorced, or dies. A lot of unnecessary strife, wasted resources, and interruption of business can be avoided by having an LLC operating agreement in place and signed by all members, making it legally binding.

A single-member LLC may not need to be concerned about disputes between members, transfers of funds, or ownership of fixed assets, but to keep the limited liability status, the sole owner must be able to show that operations are a separate entity from the owner’s private financial matters. With a solid operating agreement in place, the LLC will have its own limited liability status.

Many people create operating agreements but forget to update them. Time goes by quickly. Life happens. Businesses may grow and evolve; members may change. Financial crises such as bankruptcy may happen, or personal issues such as divorce and death may impact operations. These situations can lead to all kinds of trouble.

Even the most carefully prepared operating agreement should be reviewed regularly to ensure that it is current and reflects the plan for the business. Not keeping the operating agreement current could cause legal issues, such as having to deal with probate, should one of your members die or become incapacitated.

At 417 Business & Elder Law we are well-versed in state law and can provide you with the expertise to create and review your operating agreement for the basic requirements and ensure that the specific legal issues that impact your individual business are addressed.

This article was also published in the printed version of the Volume 11 Apr-Jun 2018 Newsletter (PDF).

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