The Importance of Written Operating Agreements

An LLC operating agreement is an agreement between the member or members of the LLC and the LLC entity. Under the South Carolina Limited Liability Company Act, the members of both single-member and multi-member LLCs are permitted to enter into a written operating agreement to regulate the affairs of the company and the conduct of its business, and to govern the relations between the members, managers, and LLC  As such, members of both single-member and multi-member LLCs often require tailored, relatively complex, and often lengthy written operating agreements to adequately define the business organization law structures of their LLCs. These agreements may be necessary in order, for example:

• To create a management structure appropriate for the LLC;
• To address relevant business organization law issues on which the South Carolina LLC Act is silent or ambiguous;
• To alter the default business organization law rules of the South Carolina LLC Act to the extent that these rules conflict with the needs and interests of the members and managers in question; and
• To address any issues under non-self-enabling and self-enabling permissive provisions of the South Carolina LLC Act.

Single-Member LLCs

Under the South Carolina LLC Act, there are at least a few default rules that may be inappropriate both for single-member LLCs whose members are either individuals or other business entities. These may include, for example, default provisions providing for member management rather than manager management and for the dissociation of members upon their bankruptcy. These LLCs need relatively complex operating agreements to override these provisions.

Evidence suggests that a substantial majority of single-member LLCs whose members are individuals lack written LLC operating agreements.  This is partly due to the fact that many individuals who conduct their business through single-member LLCs are unaware of the value of these agreements or are unable and unwilling to pay a law firm or lawyer to draft them. However, the South Carolina LLC Act expressly validates operating agreements between individuals who are members of single-member LLCs and their LLCs, and these agreements can provide four valuable benefits to these individuals.

• written operating agreements can help prevent veil piercing;
• written operating agreements can override unfavorable South Carolina LLC statutory default rules; and
• written operating agreement can function as a user manual; and
• in the event a member is disabled or deceased, written operating agreements can function as a guide for the personal representative or trustee in understanding the operations, assets, and engaged professionals of the LLC.

Multi-Member LLCs

Many  business organization law issues should be addressed in operating agreements for multi-member LLCs, including issues concerning owner dissociations, buy-sells, restrictions on transfers of member rights, management structure, allocations, interim distributions, liquidating distributions, owner and manager meetings, owner and manager voting, and fiduciary matters.  The operating agreement of a multi-member LLC is the agreement among the members and the LLC itself concerning the LLC’s business and internal affairs and the rights and duties of its members. To avoid disputes among the parties about their terms, these agreements should ALWAYS be in writing.  Whenever two or more persons decide to start a business together in the form of a multi-member LLC, they ought, ideally, to identify each material issue in their deal, resolve it, and set down the resolution in a comprehensive written operating agreement signed by all of them.

Optimal Structure of the Operating Agreement

• A title page to confer on the agreement an appropriate formality and dignity;
• A summary table of contents provides readers with an initial overview of the contents of the agreement;
• A detailed table of contents to provide readers with a detailed overview of the agreement and to find specific provisions in it;
• A table of exhibits provides readers with a quick overview of the exhibits to the agreement;
• The text of the agreement (or the body of the agreement) setting forth the terms and conditions that constitute the LLC deal; and
• The various exhibits to the agreement. The function of these exhibits should be to address specific issues in the deal that, in general, either (i) are of such importance as to deserve expression in a separate part of the agreement or (ii) are so detailed that their inclusion in the body of the agreement would unduly clutter it and impede its flow.

Should I Hire A Business Lawyer to Draft An LLC Operating Agreement

The short answer is, yes.  Even the formation of a simple, straightforward single-member or multi-member LLC will undoubtedly involve important legal issues that should be discussed with a business lawyer.  Moreover, the formation of the LLC will also involve important tax issues that should be discussed with a business accountant competent in areas of partnership and corporate taxation.  Therefore, if the members forming the LLC have allocated in or around $700 – $1,500 to engage an attorney experienced in LLC organizations, it will be well worth the money.  Note, legal fees may be somewhat higher if there is detailed legal and tax planning or the LLC operating agreement is significantly negotiated among the members.