The Importance of the Operating Agreement

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The Importance of the Operating Agreement

The Importance of the Operating Agreement

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In January 2014, the North Carolina Limited Liability Company Act became effective. Designed to minimize the impact of the transition from the old Act to the new Act, the new LLC Act stresses the importance of the company’s operating agreement.

The drafters expressed the importance of the operating agreement in the stated purpose of the new Act: “The purpose of [the Limited Liability Company Act] is to provide a flexible framework under which one or more persons may organize and manage one or more businesses as they determine to be appropriate with minimum prescribed formalities or constraints.” They went on: “It is the policy of [the Act] to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements.” Taken together, this means that the purpose of the new Act was to facilitate the organization and management of business by its owners, who could generally agree amongst themselves through their operating agreement as to how it should be operated.

In a nutshell, the operating agreement is the internal agreement between the interest owners of the LLC as to how the company should be run, who should run it and with what powers and authority, what should happen upon dissolution, whether there are any restrictions on the ability to transfer an interest, and on. Considering the scope of subjects that can be addressed in an operating agreement, a good one is vital to a company. The drafters of the new Act recognized it, so you should, too.

There are limitations on the operating agreement, of course. As with any contract, there cannot be illegal provisions in the operating agreement. Also, the drafters of the Act made certain topics out of bounds when it comes to operating agreements. For instance, certain rights cannot be contracted away. There is a list in the Act of things that cannot be done away with by clever contracting.

Despite the limitations, the importance of a well-thought out operating agreement cannot be understated. The members of a limited liability company, whether newly formed or in existence for a decade, can use the operating agreement as a way to address major concerns between the members, define rights and responsibilities, lay out the framework for operation of the company, and prevent potential conflict later, or at least make clear what will happen in the event of certain conflicts. Perhaps it is time to revisit your operating agreement, or adopt one for the first time.

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