When it comes to starting a business, a common question that I hear is, “does my LLC need an Operating Agreement?” As with most things when it comes to the law, the answer to the question is: it depends!
The operative word here is “need.” Many states do not require that an LLC have an Operating Agreement. Some states (California and New York, just to name a few) do require it. But many, Colorado included, do not require that an LLC have an Operating Agreement.
So if you’re in a state that does not require an Operating Agreement, does that mean you shouldn’t have one? NO! There are still a lot of good reasons to have an Operating Agreement for your LLC. Even a single-member LLC should have an Operating Agreement. Here are a few reasons why it is important for your LLC to have an Operating Agreement even if it is not required:
- It allows you to define expectations and responsibilities of the Members. The Operating Agreement can address who is responsible for what, what happens if a Member does not hold up his end of the bargain, and it can set forth procedures for resolving a conflict between the Members.
- It lets you avoid your state’s default laws. Many states allow an Operating Agreement to override or supplement state statutes. In the states that do not require an Operating Agreement, the state’s laws will essentially act as the Operating Agreement. Your state’s one-size-fits-all statutes may not be in the best interest of you or your LLC.
- It protects the liability protection of the LLC. Having an Operating Agreement can be a vital factor when it comes to piercing the corporate veil. The Operating Agreement can help to demonstrate the separation between the LLC and the business owners. This is especially important with a single-member LLC.
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Certainly, if you are in a state that requires an Operating Agreement, then yes, you need one. But even for the rest of us, it’s clear that an Operating Agreement is an essential document to have if you want to run a successful and legally-legit business.