The short answer, yes. A Limited Liability Company (LLC) should have an operating agreement, even if the LLC is very small or a single-member LLC.
Every LLC needs an operating agreement for two reasons, 1) the State of Missouri requires every LLC to have an operating agreement and 2) an operating agreement governs internal operations as directed by the business owner. An operating agreement helps to ensure your company is run the way you want it to be.
But first, what is an operating agreement?
An operating agreement “is an internal document that establishes the rules and regulations for the conduct of the company’s business and affairs, and the rights, powers, and duties of the company’s members, managers, and employees (https://www.sos.mo.gov/business/outreach/startup_guide).”
Essentially, an operating agreement lays out the way you want your company to be run.
For example, operating agreements often include;
A list of members including those members roles and responsibilities within the company. Often their ownership interest (or percentage) will be included.
An outline of how company decisions will be made (i.e. voting structure)
Rules regulating how membership interest can be transferred
Allocation of profits and losses among the different members
How the LLC will be taxed
Now that we know what an operating agreement is we can return to why they are necessary.
The State of Missouri Requires Every LLC to have an Operating Agreement
Although this requirement is less demanding than it sounds, it is something to keep in mind.
It is less demanding than it sounds for two reasons. First, Missouri does not require operating agreements to be filed with the Secretary of State and, second, the operating agreement can be adopted orally or written informally.
Your operating agreement does not have to be written, it can be oral. However, despite the fact that Missouri does not require a written operating agreement, it is very much in your best interests to have one.
If an LLC does not have an operating agreement, or the operating agreement is vague, and there is a disagreement among the membership on one of the points typically included in an operating agreement, a court may be required to piece together the operating agreement from oral promises and business practices. Alternatively the court may look to the default rules set out by the State of Missouri. Either approach may lead to unwanted results.
To avoid this fate, every LLC should adopt a written and well-drafted operating agreement.
An Operating Agreement Governs Internal Operations as Directed by the Business Owner(s)
The way your business operates is important to you, and is important to set out basic operations from the very beginning. This need is very pressing, especially in the case of an LLC starting with multiple members, but is also very important even in a single-member LLC.
When there are multiple members in an LLC it is very obvious that each member’s voting rights, ownership interest, and share of profits must be addressed and recorded. That is the reason you are going into business. But single-member LLCs should also create an operating agreement.
Here are some reasons why:
1) an operating agreement describes your business and helps you keep proper records (i.e. operating agreements often include direction on how funds are contributed by or distributed to, the owner),
2) an operating agreement helps separate the business from the owner (this is important to maintain the liability protections of an LLC),
3) an operating agreement clarifies what happens if you die or are unable to run the business, and
4) you avoid any Missouri default LLC organization rules that you may want to avoid.
An operating agreement is a crucial piece of an LLC and one that should be given careful attention.
You should always have an operating agreement in place to avoid such confusion, expense, and potential for unsatisfactory results in the future.
This is one of those places, as a small business owner, it really pays to hire an attorney. It is worth the expense of a well-drafted operating agreement to avoid costly litigation and disagreements in the future.
At Hometown Law we enjoy helping small businesses get started and would be happy to help you put together your operating agreement, at a reasonable price. Contact us today with any questions you have!
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