A customized operating agreement can be crucial to an LLC’s success

According to a recent article appearing in Inc. magazine, a small business survey has found confidence by entrepreneurs to be up sharply over last year with many business owners being enthusiastic over the economic prospects for 2015. While starting a small business is often a risky proposition, each year untold numbers of people decide to do just that. The Office of the North Carolina Commissioner of Small Business notes that North Carolina is home to more than 800,000 small businesses. Many of those starting a new business choose to create a limited liability company (LLC) since it combines the limited liability features of a corporation with the tax efficiencies and operational flexibility of a partnership.

According to YSF magazine, in creating a business far too many entrepreneurs fail to engage in sufficient planning to "avoid the most common pitfalls." In a Forbes magazine article it is observed that, when two or more people launch a business, the biggest pitfall is often the failure to precisely set forth in a detailed writing just "what the deal is" that has been verbally assented to by the business associates. The failure to do so can "cause enormous problems later" if disputes arise among the business associates. In the context of an LLC, the operating agreement provides LLC members the opportunity to specify just how they desire the LLC to be operated.

An operating agreement can be broadly thought of as a set of rules which governs the internal administration and regulation of the affairs of an LLC. It should be regarded as the heart and soul of the LLC. The North Carolina Bar Association observes that, under the state's new LLC Act, an LLC's operating agreement is clearly intended to govern and control the rights and duties of LLC owners. The North Carolina Lawyers Weekly notes that, under North Carolina law, "the operating agreement controls almost every aspect of the internal operation of the LLC." With some limited exceptions, the operating agreement permits the LLC to "function however its members agree."

Important provisions

Standardized "boilerplate" operating agreements, while available, often fail to address the specific concerns of prospective LLC members and do not reduce members verbal understandings to writing. As observed by the Succeed as Your Own Boss website, having a customized tailor-made operating agreement can give you "peace of mind" knowing that there is a good mutually agreed upon management plan in place. Inc. magazine suggests that a good operating agreement will-among other things-set forth:

  • How major decisions will be made.
  • How profits and losses will be allocated to members.
  • How new capital should be acquired by the company.
  • How often meetings will be held and conducted.
  • Accounting and banking procedures.

One of the most important matters which the operating agreement should address is how to break member deadlocks and resolve disputes which might otherwise imperil the business.

Entrepreneur magazine suggests that there are two good reasons to think about getting a business attorney to draft an operating agreement. First, an attorney can suggest alternatives and solutions that would not occur to even the most diligent layperson. Second, an attorney can often "anticipate problems before they arise" and take precautions by addressing those potential problems in a tailor-made operating agreement.

Seeking legal help

Those interested in forming an LLC should contact a North Carolina attorney experienced in handling business formations. The attorney can craft a customized operating agreement which will seek to protect each LLC member's business and financial expectations.