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From the Lawyers' Desk: Does My LLC Really Need an Operating Agreement?

Attorneys from Paule, Camazine and Blumenthal will post a weekly blog on legal topics of interest. To submit a topic please email: fromthelawyersdesk@pcblawfirm.com

By Patricia L. Bland of Paule, Camazine & Blumenthal, P.C.  

One of the most common questions I get from clients is the question: “Does my LLC really need an operating agreement?”  The shortest and easiest answer is yes.  All LLCs, whether single-member or multi-member, simple or complex, should have a written operating agreement.   

Missouri law requires that each LLC have an operating agreement, whether written or oral. While oral operating agreements are valid, they are more easily subject to challenge if a dispute arises among the members.  The purpose of the operating agreement is to outline the basic operation of the LLC as well as prove the rights and obligations of the members and any managers of the LLC.   

So what, you ask, is the consequence of not having an operating agreement?  The first and most important consequence of not having an operating agreement is that absent an operating agreement, the default provisions of the Missouri Limited Liability Company Act, Chapter 347 RSMo, control.  More times than not the default provisions of the Missouri LLC Act are not in line with the terms desired by the owners of the LLC.  

Take for instance the provisions controlling distribution of profits from the LLC.  Assume you are a member of an LLC and that you contributed $9,000 to the business.  Your business partner contributed $1,000.  One would assume that all future profits of the LLC will be split 90/10, based on the respective amounts of your capital contributions.  However, without an operating agreement modifying the default terms of the Missouri LLC Act, profits would be distributed as follows: (1) first, to you and your business partner until the $10,000 initial contributions have been returned proportionately to each of you; and (2) second, to you and your business partner 50/50.  That’s right; without a clear operating agreement dictating the exact percentage allocation of profits, the MO LLC Act provides that profits shall be “shared equally among the members.”   

There are other unfavorable default provisions included in the MO LLC Act which we recommend, and our clients desire, be modified.  Some of the most commonly modified provisions are those regarding management of the company.  The MO LLC Act grants each manager in a manager-managed LLC, and each member in a member-managed LLC, the authority to act on behalf of and bind the LLC.  However, there may be certain things that you and your business partner believe should require the consent of both of you.  Take for instance the simple task of entering into a lease for office space for your new business.  Without an operating agreement that requires the consent of you and your business partner to enter into a lease, it is possible that each of you could bind the company to lease two different locations.    The operating agreement should be carefully tailored for each LLC to identify the specific persons authorized to take action on behalf of and bind the company as well as the types of action that such person may take.   

In summary, it is always our position that each and every LLC should have a written operating agreement to document and set a framework for the operation of the business.  It is also wise to consider whether additional provisions should be included in the operating agreement, such as provisions restricting transfer of membership interests, buy-sell provisions, or covenants not to compete.  

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