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Salt Lake City Bookkeeping Blog

What Are Small Business Operating Agreements?

Posted by Thomas Liquori on Jan 20, 2017 9:00:00 AM

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What Are Small Business Operating Agreements?Whether you have a small business that’s been up and running for years, or you’re an entrepreneur thinking about opening a company, you still need an operating agreement. Unfortunately, operating agreements are not always in place in small businesses across the country, which is a misstep — especially for LLCs.

Instead of opening your doors to potential legal and operational problems, it’s much better to make sure you have an operating agreement for your business, even if it’s just a two-person organization.

What Is an Operating Agreement?

If you’re unfamiliar with the term “operating agreement,” don’t worry — it’s fairly straightforward to understand.

Operating agreements are documents that give insight into your business’s rules, finances and provisions. All the internal workings of your company are outlined in the operating agreement. After your operating agreement has been written, it should be signed by everyone who is an LLC member. This binds you and your operational teammates, and indicates you’re on the same page about the way your small business will be run.

How an Operating Agreement Protects Your Small Business

Although you might assume that an operating agreement is just a formality, it’s actually a document that will protect you from serious issues. Some of the benefits of having an operating agreement in place include:

  • You’ll be protecting your personal property. As an LLC, if you’re sued, you may not be personally liable if you have an operating agreement.
  • You can minimize disagreements between owners and colleagues. Because the operating agreement lays out the plan for running the business, it’s easier to reduce the chances that foreseeable errors will arise.
  • You can stay legally on top of everything. You’ll want a lawyer to help with your operating agreement, even if it’s just to make sure the verbiage is clear.

Can Your Operating Agreement Be Changed?

Over time, it may be necessary to change your operating agreement by striking out clauses, changing wording or making other modifications or deletions. For instance, if your operating agreement talks about the responsibilities of managers, and your industry is hit with new laws or rules, you may have to update those responsibilities.

A good example of this was when the HIPAA guidelines changed parameters for many supervisors and front-facing personnel in the healthcare marketplace.

Obviously, any alterations to the operating agreement require the acceptance of all applicable personnel.

When in Doubt, Ask for Advice

Still not sure if an operating agreement is needed at your small business? Consult a professional. It’s much better to have one in most cases than to leave yourself open to pitfalls that might have been avoided.

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Topics: Small Business, business agreements, operating agreements