Many of our small- and midsize-business clients at Joyce & Bary Law are organized as limited liability corporations. The LLC offers a good blend of personal liability protection, operating flexibility and tax options.
It’s a mix that especially benefits businesses with a small team of owner-operators, but you’ll find LLCs of all sizes — from large companies to sole-owner operations.
The LLC is also attractive because it is easy to set up. In fact, the process is so easy that many folks leave themselves exposed because they don’t follow up with the additional, critical step of signing an operating agreement.
What is an operating agreement?
An operating agreement is an internal legal document that designates how your LLC will be managed. It outlines the rights and responsibilities of the members and their ownership stakes.
Your LLC’s operating agreement can include most anything — spending limits for members, intellectual property terms, how members can exit the LLC — as long as none of the provisions violate the law or your articles of organization.
An operating agreement is legally binding among the members of an LLC. Without an operating agreement, Virginia state law governs how your LLC operates.
What should be included in an operating agreement?
At minimum, an operating agreement should include the following:
- The name and purpose of the LLC
- When the Articles of Organization were filed and by whom
- Any pertinent organizational history of the LLC, including name changes
- The names and addresses of the members
- The percentage of ownership that each member holds
- The rights and responsibilities of the members, including their voting rights and management responsibilities
- The procedures for adding or removing members
- The distribution of profits and losses
- The method for amending the operating agreement
- Information regarding how meetings will be conducted
- The process of how to dissolve the company
Operating agreements are highly customizable depending on the needs of the members. Other provisions that are frequently added govern matters including:
- Spending limits for individual members
- Procedures and requirements for entering into contracts
- When and how assets may be sold
- When members might be required to make additional contributions
- Intellectual property
- What happens if the members cannot agree
- Limited liability of individual members
- Noncompete/nonsolicitation for members who are involved in other businesses or leave the LLC
When we draft operating agreements at Joyce & Bary Law, our clients benefit from the experience we’ve had creating other agreements and getting folks out of messy situations.
There’s not much we haven’t encountered before, so we’re prepared to offer suggestions about your operating agreement that might be specific to the nature of your business — its size, your industry, or what you hope to do with your business in the future. That’s the expertise you won’t get if you download an operating agreement from the internet.
Does Virginia law require an LLC to have an operating agreement?
No. An LLC formed in Virginia can legally conduct business without an operating agreement.
Then, do I really need the operating agreement?
Yes. An operating agreement is a critical part of the legal infrastructure of your business. We have so many reasons for saying that, but here are the Big 3:
Limited liability protection
Protecting yourself and the LLC’s other members from personal liability is the No. 1 reason for signing the operating agreement. The agreement confirms your limited liability and adds credibility to your LLC’s existence as a separate legal entity.
Owners of single-person LLCs mistakenly assume that they don’t need an operating agreement because they are the one-and-only owner in their business, so they won’t get into conflicts with other members. This thinking misses the mark on liability. Without a formal operating agreement, your limited liability could be called into question because your business looks more like a sole proprietorship.
Setting your own rules
As you’ve read, your operating agreement sets out how your LLC is managed, profit-sharing procedures, how decisions are made and more. If your LLC doesn’t have the operating agreement and a legal dispute arises, the court will look to Virginia state law to determine rights and responsibilities, and those laws may not align with the intentions of the members.
For example, Virginia law says this:
“An act of a member, including the signing of an instrument in the limited liability company name, for apparently carrying on in the ordinary course the limited liability company business or business of the kind carried on by the limited liability company, binds the limited liability company, unless the member had no authority to act for the limited liability company in the particular matter and the person with whom the member was dealing knew or had notice that the member lacked authority.”
To translate, a member of your LLC can sign a contract that binds the LLC unless the member had no authority to do so.
What defines whether or not they had the authority? Well, that’s up for debate unless your operating agreement spells out specifically when members can sign binding documents and what level of agreement among the members is required.
Reducing and resolving conflict
You’re rarely thinking of all the things that could go wrong in your business when you found your LLC. You’re excited and ready to get started, and all you can see is possibility. It’s a great place to be.
But disagreements will arise among members and things will go wrong from time to time. If it becomes necessary for a member to leave the LLC, it’s better to have thought through what that looks like before the time comes. Such foresight will protect individual members as well as the LLC.
Can Joyce & Bary Law help draft an operating agreement for my LLC?
We thought you’d never ask! Absolutely. We would love to hear more about your LLC and the matters you would like to cover in an operating agreement. In the process, we can help set up your LLC or review the documents you’ve already filed to ensure you’re good to go. We can also add our firm as your LLC’s registered agent so your entity stays up to date and protected. Contact us to schedule some time to talk.
