As a Grand Rapids, MI business lawyer, I have helped many Michigan entrepreneur business owners start their businesses. Many of them want to form their business as a Limited Liability Company (LLC). This leads us to a conversation about the LLC Operating Agreement. To my initial surprise, many of the business owners I meet with ask, “what is an operating agreement?”
A LLC operating agreement is like Bylaws for a corporation. Don’t worry – if you don’t know what Bylaws are, I will cover them in a future post. According to wikipedia, an operating agreement is “an agreement among [LLC] Members governing the LLC’s business, and Member’s financial and managerial rights and duties.”
LLCs are a “creature” of state law, so it is important to note that you can find Michigan’s Limited Liability Company Act here. Michigan law defines an operating agreement as “a written agreement by the member of a limited liability company that has 1 member, or between all of the members of a limited liability company that has more than 1 member, pertaining to the affairs of the limited liability company and the conduct of its business.” (MCL 450.4102(2)(r)). Pretty close to the wikipedia definition.
Although not required, an operating agreement is a very important tool for two key reasons: (1) it forces the Members (owners) to determine how they want the LLC internally governed, and (2) it puts those directions down on paper so it’s not left up to “he said, she said” if there is a disagreement among Members down the road. If you don’t have one, you will be at the mercy of the LLC statute’s default provisions. It’s your business, don’t YOU want to decide how it’s governed or do you want the State of Michigan to tell you?!
And in case you are thinking “I’m the only owner, an operating agreement isn’t even valid with only one owner,” think again. Michigan law specifically authorizes operating agreements for single-member LLCs and having one is a great idea for the #1 reason mentioned above and as additional support for the “limited liability” provided by the LLC in the first place.
Thinking about starting a business and want to form an LLC? Already have an LLC but not an operating agreement? Or do you have an operating agreement and not understand why or what it means to your situation? Call us today at 616-827-7596 to schedule a comprehensive Small Business Strategy Session. And if you mention this blog post we’ll waive the session fee (a $1,250 value!)
Michael Lichterman is a relationship-based business attorney who leverages his business, marketing and legal knowledge to help business owners and entrepreneurs create a Foundation for Business Success™. This goes beyond merely drafting a set of documents – it’s about proactively preparing the business and the business owner for continued growth while remembering the “human side” of running a business. He best serves small business owners (less than 50 employees) and entrepreneurs. He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients and their businesses – many of which have become great friends and trusted confidants.