Starting a business often feels urgent. Owners may focus on finding customers and earning revenue. They may form a limited liability company but put off creating an operating agreement. An Ashburn business and corporate lawyer can help owners understand why that document is important before a disagreement or unexpected event occurs.
What is an operating agreement?
An operating agreement sets the internal rules for an LLC. It can explain who owns the company and who has authority to make decisions. It can also address how money is shared and what happens when an owner wants to leave.
Virginia law allows LLC members to create an operating agreement for the company’s affairs and operations. The agreement does not always have to be written. However, a written agreement is usually easier to prove and follow.
The articles of organization filed with the Virginia State Corporation Commission create the LLC. The operating agreement explains how the owners will run it.
What rules apply if your LLC has no agreement?
An LLC remains valid without an operating agreement. Instead, Virginia’s default rules control many internal decisions. Those rules may not match what the owners expected.
Virginia law generally gives management authority to the members unless the articles or a written operating agreement provide for managers. Members also vote in proportion to their contributions unless the company documents provide another rule.
This can cause surprises. Two owners may believe they have equal control even though one contributed more money. An owner may also believe a verbal promise controls, but the parties may remember that conversation differently.
How are profits and distributions divided?
Owners sometimes assume that profits will be split based on the hours each person works. Others expect an equal split because they started the company together. Virginia’s default rule may produce a different result.
If the company documents do not set another written rule, profits and losses are generally allocated according to the recorded value of each member’s contributions. Cash or property distributions follow the same basic rule.
A written agreement can use a different system when the law allows it. An Ashburn business and corporate lawyer can help the owners describe that system in language that reflects their actual plan.
What happens when an owner leaves or dies?
A business can face serious problems when an owner dies or can no longer take part in the company. Virginia law treats death as an event that separates an individual member from the LLC unless the company documents provide otherwise.
An heir does not automatically gain every management right held by the former member. Virginia law limits the transferable interest to a share of profits and losses plus the right to receive distributions. The remaining members may then disagree with the family over the value of that interest or the company’s future.
An operating agreement can create a buyout process. It can explain how the ownership interest will be valued and how payment will be made. It can also address disability or bankruptcy before a crisis occurs.
Can owners become stuck in a deadlock?
Yes. Owners may reach a point where they cannot agree on an important decision. Without a useful operating agreement, there may be no clear process for breaking the tie.
A deadlock can delay contracts or hiring. It can also stop the owners from approving major spending. The conflict may become expensive if the owners turn to litigation.
In some cases, a Virginia circuit court may dissolve an LLC when it is no longer reasonably practicable to carry on the business in line with its articles and operating agreement. A well-drafted agreement may reduce that risk by creating a voting process or a way for one owner to buy out another.
Is an agreement useful for a one-owner LLC?
Yes. A single-member LLC does not have disputes between co-owners, but an operating agreement can still explain how the company should operate. It can guide another person who must manage the business after the owner’s death or incapacity. It may also help with business banking or lending.
When should you create an operating agreement?
The best time is usually before problems arise. Owners can discuss authority and ownership while everyone is focused on the company’s success. They can update the agreement when a new member joins or the business changes direction.
Brandon Davis, Esq. can help LLC owners create an agreement that fits their company and complies with Virginia law. To speak with an Ashburn business and corporate lawyer, call (540) 425-8278 or fill out our online contact form.
