Your LLC is a separate person. So how does it make decisions? Who feeds Mr. LLC? What happens to the money Mr. LLC earns and the assets he owns?
The answer—the operating agreement. It’s just a written agreement between the owners of the LLC to settle these matters. The people who own Mr. LCC (called the members) are the LLC’s brain. Without a brain you can’t survive and make decisions. They make its decisions and act on its behalf.
The operating agreement includes things about Mr. LLC’s money, assets, membership, and day-to-day decision making. It includes how Mr. LLC’s big decisions are made, how his records are kept, what his standards are, and how to resolve disputes. It can also include what happens when a member dies, is disabled, goes bankrupt, or gets divorced.
The members don’t have to have an operating agreement to do this. If the members don’t have an operating agreement, then Alaska’s LLC statutes will decide how the brain functions. But if you want to control how the brain functions, then you’ll need an operating agreement.
There’s another aspect to consider. The process of negotiating an operating agreement is a great way to set everyone’s expectations up front. It can help avoid surprises down the road. It’s like a prenuptial agreement for the members and it’s a whole lot easier to agree on things when everyone is happy and still in the honeymoon period, than when everyone is mad at each other. Remember, you’re not locked into the agreement. The members can always agree to change the operating agreement as time goes on.
Do you still need an operating agreement if you’re the only member? If you’re the only member of the LLC, then you’re the one making all the decisions. But if you don’t have an operating agreement, the default rules still apply to you. Sometimes you’ll have to show lenders and landlords your operating agreement. The operating agreement also helps ensure that your legal, tax, and financial structures are in place. An operating agreement serves as a good guidebook to maintain Mr. LLC. So it’s not a bad idea to have an operating agreement even if you’re the only member.
Finally, when it comes to operating agreements, there is no one-size-fits-all solution because there are many different types of LLCs. It’s like getting a suit or a dress. When you walk into a store to buy a suit or a dress, they don’t offer just one size of suit or dress. They have multiple suit or dress sizes that work for just about every body type. The same is true with LLCs. You need to make sure your operating agreement fits you right. There really is no one-size-fits-all solution.