Limited Liability Company Operating Agreement: Do You Really Need One?

Wisconsin laws do not require a written Operating Agreement.

Decision made. Right?

Not so fast.

Even though the law says it is ok, you should fight the temptation to go without one.  You should also resist the temptation to use a generic one supplied by someone without the expertise to explain the terms in it. Put bluntly, you should never consider forming a limited liability company without using an Operating Agreement drafted by a competent attorney that can tailor the document to meet your needs.

Why does an Operating Agreement matter?

First and foremost, a written Operating Agreement stands out, in a good way. A written Operating Agreement helps to ensure that courts will respect your personal liability protection.  This is primarily because courts are familiar with companies that have policies memorialized in writing.  Without the written Operating Agreement, you company may appear incomplete to the judiciary. At a minimum, a well drafted Operating Agreement helps show that you run your limited liability company in top form and as a legitimate business.

An Operating Agreement is also a great way to set rules in place that govern how profits and losses will be divided, determine how major business decisions will be made, and lay out the procedures for handling the addition or the removal of members. For instance, having language in your Operating Agreement giving existing members the right to first refusal on any transfers of company ownership to nonmembers is critical. This is because it avoids having your current co-owner pick a new co-owner for you.

While it is difficult to think of all the issues and cover them, a written Operating Agreement can help to avert misunderstandings among the owners over finances and management. This can help to avoid litigation. When disagreements do occur, an Operating Agreement can also call for arbitration and mediation rather than court. This can keep the company’s issues out of the spot light. Public battles between owners can cause the public to lose confidence in the company, even if the product and services continue to be top notch.

Finally, a written Operating Agreement setting forth how the members interact allows the Limited Liability Company members to create their own rules of operation.  In the absence of an Operating Agreement, the day to day operations would be governed by the default rules in Wisconsin’s Limited Liability Company Code. Those rules are generic and sometimes fail to match the individual circumstances of the company and its members.

Why use an attorney?

While there are online services and accountants that offer to “form an LLC” for you, you should be leery.  As business litigation attorneys, we’ve been approached by individuals that have done so.

We’ve seen some problems in the downloaded versions supplied to purchasers at a cut rate, including references to the wrong jurisdiction (one was the United Kingdom), blanks left unfilled, only 55% of ownership designated (who owns the rest?), no right to first refusals when needed, no plan for departure or death of a member, and so on.

The individuals often ask us to “fix” LLCs that were formed incorrectly or incompletely. Sometimes we can just amend the current Operating Agreement and it is fixed. Sometimes, when the members are at odds with each other, the only fix available is through the court system.  That is an expensive and stressful road to have to take.

It is important to get legal advice on your Operating Agreement. Despite the temptation to save the money, one should have an Operating Agreement drafted by a competent business attorney.  The dollars spent up front on a well drafted Operating Agreement will surely save you time, money, and stress down the road.