When setting up a limited liability company (LLC), one of the most important steps is to draft your operating agreement, a foundational document that dictates how decisions are made, how ownership is structured, and so much more. It is, essentially, a contract that binds the owners to a set of rules.
However, despite the importance of an operating agreement in the business formation process, there are some common mistakes that can seriously affect how the LLC functions.
As such, knowing what to avoid when drafting the operating agreement, you’ll be helping your company begin correctly. These things include the following:
Not Having One Altogether
Perhaps the only thing that is worse than having a poor operating agreement is not having one at all.
It’s common for partners who begin a business together to plan on drafting the operating agreement and then never get around to it, leaving you stuck with Texas’ default rules; other people copy and paste from online templates, which can lead to following provisions that make little sense in Texas.
Even if you are a single-member LLC, you’ll want to have an operating agreement to avoid those default rules and the need to adhere to corporate formalities.
Using Ambiguous Language
The purpose of any operating agreement is to clarify, not confuse; the agreement should act as a roadmap that offers instructions for decision-making, operating, and all other important matters, which means you must create clear rules, processes, and guidelines.
Many times, however, the language used in the operating agreement leaves room for interpretation, and that can lead to serious issues in the future. One of the reasons to have legal counsel during all steps of the business formation process is to avoid these sorts of issues.
Leaving Potential Loopholes
In a similar fashion, another issue that can arise if a lawyer isn’t involved in the drafting project involves loopholes. Unless you’re experienced in business law, you may not be able to spot when language in an agreement leaves behind loopholes that parties can exploit in the future. Even if you draft the agreement yourself, you want to have a lawyer read through it and make recommendations to ensure you’re covered.
Many of the provisions in an operating agreement are straightforward, but others are decidedly more complex. In the excitement of beginning a business, many partners set aside these more difficult sections of the operating agreement, either to work on them later or to just leave them out.
Most people don’t come back to rework their operating agreements and add these sections back in, but it’s always better to work through the entire agreement, even the difficult sections, all at once.
Leaving In Unnecessary Sections
Compared to omitting sections, the other side of the coin is leaving in too many sections that don’t apply to your LLC at all. That “more is better” mindset usually arises when a lawyer isn’t involved in the business formation process. Having unnecessary sections may not seem dangerous, but it could cause problems in the future.
Failing to Sign
One last surprisingly common issue is failing to sign the operating agreement, which derails the efforts you put into creating it. It won’t become an issue until (or unless) partners get into a dispute and one wants to enforce the agreement’s terms on the other, but by getting a business lawyer involved, it won’t become an issue at all.
Rely on Experienced Business Lawyers
As you get ready to launch your LLC, consider reaching out to business lawyers with experience in business formation. Though you may think drafting an operating agreement is a simple process, having a keen and knowledgeable pair of eyes can make a world of difference. Contact Sul Lee Law Firm to speak with a business lawyer in Dallas, TX, today.