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Why You Need An Operating Agreement: 8 Operating Agreement Tips

Embracing The Ties That Bind

Brett Farmiloe headshot
Brett Farmiloe
Photo of a newly formed work team.

Operating agreements are pivotal in outlining a business’ financial and functional decisions. It’s the guiding document that bonds and legally protects business partners. Nonetheless, up-and-coming mortgage pros opening a brokerage with partners often neglect it. Learn why these eight business owners and entrepreneurs stress the importance of operating agreements and tips to help you complete yours.

‍Establishes Structure

If you are the proud owner of an LLC, then you need an LLC operating agreement! An operating agreement establishes your company’s structure, helps protect your limited liability status, and creates the governing rules of your business. The only tip I have for writing an operating agreement is not forgetting to have your co-owners and lawyer sign it to make it official and legal. After that, you are set! 

Vicky Franko, Insura

Outline Everyone's Powers And Responsibilities

If you have formed a limited liability company, otherwise known as an LLC, you must have an operating agreement. This document can help protect you from personal liability and save you lots of stress down the road if anything goes awry with internal affairs down the road. When crafting an operating agreement, my tip is to really spend some time outlining everyone’s powers and responsibilities. The less you leave to the imagination, the better.

Blake Murphey, American Pipeline Solutions

Because Lawyers Say So

Whenever an attorney or CPA gets on my case for something, I listen and do it. I respect their expertise and experiences. If they’ve seen business owners like me get burnt for things like not having an operating agreement in place or posting labor law posters, I make sure that our posters are displayed, and an agreement is in place. Even if you are the sole owner of a business, avoid future lawyer freak out moments by getting an operating agreement in place.  

Brett Farmiloe, Markitors

Plan For An Unexpected Exit

You and your business partner are most likely in the honeymoon phase and don’t think it is a good use of your limited funds to invest in legal counsel to document how one or both of you can make your exit. However, you would be wrong. It is much easier to set up a win-win exit strategy in advance than after emotions are high and people feel burned by their former best friend and business partner. Until business partners fully understand the importance and have the tools to negotiate expectations, business divorces will continue to occur at high rates. Worse, the business’s value diminishes significantly because of the distractions caused by these unproductive transitions and transactions.

Katharine Halpin, The Halpin Companies Inc.

Hire A Professional

An operating agreement defines what duties members are responsible for as it pertains to the business and is also a blueprint of what happens to the company in the event of divorce, death, and dissolution. I believe it is vital to hire an attorney to prepare an operating agreement when a business gets started. A professional will ask the questions you may not think about, and it is best to hammer out the details with all involved before any issues arise, so decisions are made with a clear head and without emotion.

Kimberly Bogues, Flourish Business Services, LLC

Don’t Leave It To Your State’s Default Clauses

The law may use jargon such as that the operating agreement can be printed, oral, or inferred. The implicit agreement essentially implies that although there is no formal or oral agreement, it is understood that the participants wish to be ruled by the default clauses. However, even though a state does not need an operating agreement, it is a wise business decision to have one and even smarter to have one in writing. The agreement may protect the status of your business, ensure that each member abides by the rules, and help alleviate any problems or misunderstandings that may arise—including for single-member LLCs. If the deal has been sealed, retain copies of all your private business documents. So don't forget about that!

— Sylvia Kang, Mira

Clarify The Grey

Having an operating agreement with a business partner is a great way to avoid conflict and ensure you are operating within the original vision and charter of the organization. My tip for writing an operating agreement or any other similar document is to be exhaustive with brainstorming areas of the business that may need to be addressed. While some situations at the onset may seem mundane, addressing these proactively will only maintain sanity in the business relationship, which will contribute to the organization’s overall health.

Steven Brown, DP Electric Inc.

Avoid Getting Sued Easily

If you want to get sued easily or risk facing bankruptcy over one mistake in your business, don't have an operating agreement in place. Operating agreements are basically your way of saying, “Hey, you can't sue me on this because I already outlined my practices on this contract.” Operating agreements are important in protecting you from losing everything you worked hard for. My greatest tip for writing an operating agreement is to consult with a professional first. You don't want to miss any clauses that may jeopardize you in the long run. If you can't find someone to help you, make sure whatever rules you write are as specific as possible. That includes names, addresses, who you're addressing, under what provisions, etc. 

Manny Vetti, Back Taxes Help, LLC


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This article was originally published in the NMP Magazine May 2021 issue.
Brett Farmiloe headshot
Brett Farmiloe

Brett Farmiloe is the founder & CEO of Markitors, a digital marketing company that connects small businesses to customers through organic search.

Published on
May 26, 2021
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