This post answers the following question: Is an operating agreement required?
As is the case for many issues pertaining to limited liability companies, the answer varies from state to state. To answer this question, we need to examine the relevant statutes for each state.
Most States, Operating Agreement Not Required
Most states do not require that an LLC have an operating agreement. For example:
- In California, Corporations Code Section 17701.02(s) defines an operating agreement. However, the statutes that govern formation of LLCs do not require an operating agreement.
- In Delaware, Limited Liability Company Act Section 18-101(7) defines a limited liability company agreement (Delaware’s term for an operating agreement). But here, too, the statutes that govern formation of LLCs do not require an operating agreement.
Some States, Operating Agreement Required
However, some states do require an operating agreement.
- New York – Limited Liability Company Law Section 417 states: “Subject to the provisions of this chapter, the members of a limited liability company shall adopt a written operating agreement that contains any provisions not inconsistent with law or its articles of organization….”
An LLC operating agreement is not necessarily compulsory, although this depends on the state where your business is based. You could get into a lot of unnecessary strife if situations change in your LLC. Without an operating agreement you have no recourse if something goes badly wrong with the business.
Having an operating agreement in place will help you to protect your limited liability status, prevent management and financial misunderstandings, and ensure your business follows the rules that you have chosen and is not forced to adhere to any default rules that have been created by the state where your business is established. It is recommended that all LLCs have operating agreements, even if you are the sole owner of the company.
An LLC Operating Agreement Protects its Limited Liability Status
The presence of an operating agreement helps to ensure that the courts will recognize your personal limited liability. This is typically important in a single-person LLC where, if an operating agreement is not present, the LLC will resemble a sole proprietorship. With this formal agreement, your LLC’s individual existence will have its own limited liability status.
State Default Rules Can Seem Alarming
All U.S. states have laws that determine the basic rules for operating an LLC. Some of these will play a role in the governing of your business unless you have ensured your operating agreement states its own wishes. These state rules are typically called default rules.
This blog does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact a lawyer directly.