Why should my new business have an operating agreement?

On Behalf of | Jul 11, 2022 | Business Law |

When starting a business in Florida, you’ll need an operating agreement for one of the most popular structures, a limited liability company, or LLC. This business structure offers more personal protection but less formality, so why do you need an operating agreement?

What is an operating agreement, and why is it necessary?

An operating agreement is essential under business law because it outlines a company’s financial and functional decisions involving rules, regulations and provisions. Its purpose is to govern internal operations in a way that suits its owners. Operating agreements give LLC member-owners protection from personal liability in the business’ operation. LLCs without this protection will closely resemble a sole proprietorship or partnership, which have no personal liability protection.

Operating agreements will also help clarify any verbal agreements you make during your operations. An operating agreement will also help protect your company against any state default rules, which may not be to your liking, that apply to businesses that do not have an operating agreement. State rules regarding operating agreements under business law are vague and may not fully protect your company from liability.

Operating agreements cover the following:

  • Ownership percentages
  • Voting rights and responsibilities
  • Profit and loss distribution
  • Powers and duties of managers and members
  • Options for meetings
  • Buying and selling rules

Do I absolutely need an operational agreement?

In a word, you don’t need one if you establish your business structure as an LLC. Nevertheless, it’s a good idea to draft one when you prepare other documents related to the establishment of your business. Keeping your operating agreement with the other core records of your business makes sense because of the critical procedures it details.

Operating agreements are just one facet of establishing your Florida LLC. Other documents you may possibly need include contracts, non-compete and non-solicitation agreements, fiduciary responsibilities of owners, real estate and land concerns and what will happen if the company dissolves. When creating a company, try to cover all of your bases. If in doubt, it’s better to create these documents just in case instead of scrambling when you need one.