Many small business owners assume operating agreements are only for large companies or companies with multiple owners or that state laws provide default rules that are “good enough.” In reality, an operating agreement is one of the most important documents a business can have, regardless of size.
An operating agreement is not just a formality. It is the rulebook for how your business operates, how decisions are made, and what happens when something goes wrong. Without one, you are leaving critical issues to third parties that do not have your specific business or needs in mind or worse, to costly litigation.
What an Operating Agreement Does
At its core, an operating agreement governs the internal affairs of a limited liability company (LLC). It typically addresses:
Even single-member LLCs benefit from having these terms in writing. An operating agreement helps reinforce the separation between the owner and the business, which is critical for liability protection and credibility with banks, investors, and partners.
The Risk of Relying on Default Law
If your LLC does not have an operating agreement, state law fills in the gaps. Those default rules may:
In other words, the law—not you—decides how your business runs. That can lead to unexpected outcomes, especially during disputes or transitions.
Preventing Disputes Before They Start
Most business disputes are not caused by bad intentions. They happen because expectations were never clearly defined. An operating agreement forces owners to address difficult questions upfront, such as control, compensation, and exit rights.
When disagreements arise, a clear operating agreement can reduce conflict, limit litigation risk, and provide a roadmap for resolving the dispute. That certainty can ultimately preserve your business and its value.
Courts also tend to enforce well-drafted operating agreements, which gives owners predictability when it matters most.
Supporting Succession and Exit Planning
Operating agreements play a critical role in succession planning. They can restrict or permit transfers of ownership giving the members control over who they partner with. Otherwise, you can end up with an unintended new owner. Operating agreements can also establish buyout rights and valuation methods rather than leaving the decision to statute or a court. Having a solid and current operating agreement gives the business owner the ability to coordinate the transition of the business with an overall estate plan rather than leaving their interest to a “default statute” or the intestate succession laws.
Without these provisions, a death, divorce, or bankruptcy can disrupt operations and force owners into unwanted partnerships or sales.
A Living Document—Not a One-Time Task
An operating agreement should evolve with the business. Growth, new partners, financing, and changes in tax status all warrant review and updates. A document drafted at formation but never revisited often fails when it is needed most.
For example, when an LLC adds members, an updated operating agreement incorporates those new members to reflect voting power and whether the power to bind the company has changed. Imagine if your company has two members and requires a unanimous vote for key actions. Adding another member or two or three might lead you to change the requirement or risk not being able to make any decisions. Remember that not every owner has the same percentage of ownership, so the number could change just by redistributing the shares or adding more shares.
Maybe one owner adds more money or time to the company and the company reallocates shares on that basis. That change now affects how the business operates and possibly how many votes are needed for key decisions. Maybe you want to change the structure of the business or a member dies or the tax elections change; all of those changes should prompt re-examining your operating agreement.
How We Can Help
Setliff Law works with small business owners to draft and update operating agreements that reflect how their business actually operates. The goal is clarity, flexibility, and protection, both day-to-day and during major transitions.
If you own an LLC and do not have an operating agreement—or haven’t reviewed yours recently—it’s worth taking a closer look. The right agreement can prevent costly problems and give you greater control over your business’s future.
For more information, contact Mitchell Goldstein (mgoldstein@setlifflaw.com) at (804) 377-1269, or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.
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