Forming an LLC is only the first step in the paperwork involved in founding a business. Once you’ve completed your required state paperwork and LLC formation process, you need an operating agreement.
This legal document outlines how your LLC operates, including information about ownership, profit and loss distribution, how you’ll pay taxes, etc.
Although Idaho does not require an operating agreement, you should still consider drafting this important legal document.
If you ever face a disagreement or discrepancy in how you do business, an operating agreement can provide clarification.
Here’s a look at the benefits of an operating agreement and why Idaho businesses should have one.
Customize Your Business Operations
One of the largest benefits of creating an operating agreement is that it allows you to customize your business and its structures. Without any customization to your business operations, you’re subject to Idaho’s LLC statute.
By drafting an operating agreement, you can customize many areas of your business, including:
- Definition of the division of profits and losses among owners
- How an owner can transfer their interests in the business
- The method you’ll use to pay your business taxes
- Who is permitted to sign for business accounts
Your operating agreement can include additional details about your business, as well. Unless Idaho’s statute on LLCs prohibits a specific activity or information from being included in your operating agreement, you can choose to outline these details in the document.
Protect Owners’ Limited Liability
The main reason that an organization and its members look to form an LLC is to limit their liability. This means that the owners of the LLC cannot be held personally and fiscally responsible for the LLC’s obligations in case something goes wrong.
However, to protect the owners’ rights to limited liability, they must operate the business with care and tact, and separate personal and business finances. One way of making this extremely clear is to create an operating agreement.
The document serves as proof of how finances are intended to be handled in case one owner missteps or there is any sort of confusion about finances.
In the case of an LLC with only one owner, the courts are more likely to pierce the veil, meaning removing the limited liability protections. This makes it even more important for single-member LLCs to create an operating agreement to strengthen those protections.
Define How Decisions Are Made
As part of an operating agreement, you’ll define how business decisions are made. This area of the operating agreement is especially helpful for multi-member LLCs. When multiple people are involved in decision making, things can get complicated and confusing.
An operating agreement identifies who has the power to make decisions and what decisions that individual is tasked with. All owners might not be completely equal. In an operating agreement, you can outline different levels of ownership and what decisions individuals who are designated as those levels are permitted to make.
These agreements can also be beneficial if they outline what happens when owners disagree and voting ends in a tie. You can give tie-breaking votes to a specific owner or get a third party involved. How you outline these issues is up to you.
Talk to your Idaho business attorney for tips and advice on how to handle these elements.
Third-party Companies Might Require an Operating Agreement
Even though Idaho does not require that LLCs draft an operating agreement, other companies that you collaborate with might require the agreement.
For example, some banks won’t allow your LLC business to open a bank account without an operating agreement. Investors might feel the same way about wanting to see an operating agreement before investing.
An operating agreement provides reassurance and proof that your business operations are sound and worth taking a chance on. Without this detailed information, businesses might see your operations as too risky to invest in.
Draft an Operating Agreement with Generations Law Group
You’ll want to engage an Idaho business attorney to work with your business to draft your operating agreement. An attorney will ensure that your agreement will assist you in case of any legal questions and look attractive to potential third parties, including investors.
Book a consultation with Generations Law Group today to learn more about our services.
