WHAT IS IT?
An operating agreement is like a combination partnership agreement and corporate bylaws and, other than the state laws and your articles of organization, it completely governs the workings of your LLC. The operating agreement sets up the structure for the entire working relationship of your LLC. Specifically, it spells out the percentage of ownership; the percentage share of profits or losses; who has authority to do what; whether it is member or manager managed; what responsibilities each member and/or manager has; what happens if one or more member(s) leaves for any reason; and more.

WHY IS IT NECESSARY?
It is true that an operating agreement is not required in most states. However, because a LLC lacks the structure that a corporation automatically has when it is formed, your LLC should have one even if you are the only owner. If you have one or more partners, it would be absolutely foolish to not have one. Besides the structural reasons above, an operating agreement protects you from management and ownership misunderstandings that would probably occur without one. Additionally, because state laws govern LLCs, an operating agreement ensures your own rules run your LLC instead of, by default, the state?s. However, the most important reason to have an operating agreement is to protect your LLC?s liability status.

LIMITED LIABILITY PROTECTION
Since the most common reason a Limited Liability Company is formed is to limit personal liability to the assets of the LLC, it would not make sense to allow the possibility of your LLC loosing this very protection. By having an operating agreement, your LLC will be more likely to garner the respect of the courts. This is probably most important with single member LLC?s. Often courts will look to see if there is separation between your business and personal operations. They will ask, ?Is this business run any differently than a sole proprietorship?? The formality of an operating agreement lends that much more credibility to the separate existence of your LLC.

AVOIDING STATE?S DEFAULT RULES

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