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The Importance of an Operating Agreement

documentsWHY DOES EVERY LLC NEEDS AN OPERATING AGREEMENT?

The Operating Agreement for a LLC is the essential document that is referred to when issues and lawsuits concerning the LLC need to be resolved. The Operating Agreement is by far the most important and essential document for your LLC, and when you form an LLC, you should immediately look into getting one drafted or created by a qualified attorney. In the LLC Agreement document, the members will be provided with a clear set of rules that all members have agreed upon, greatly reducing the likelihood of disagreement between members in the future. It is very important that you create an Operating Agreement for your LLC entity, because without the formality of an agreement, the basic operation of the LLC would be governed by state law, which may not be advantageous to the LLC, it members, or the business it conducts. Each state LLC statute contains basic operating rules for LLCs, including Oklahoma, and those statutes will govern your business unless your Operating Agreement states otherwise (these are called “default rules.”). An Operating Agreement is personalized to your business and members’ needs, wants, and desires. The Oklahoma statutes were drafted by legislatures, and the best way to avoid having your business run in a way that you do not agree with is to have an Operating Agreement.

Do not let the State tell you how to run your LLC

Oklahoma LLC statutes, for example, have default rules that govern how certain business decisions should be made, such as how the LLC will be managed, rules for holding meetings and taking votes, rules for the sale of the LLC, how profits and losses should be allocated, amending the Operating Agreement, admitting a new member, and dissolving the LLC. Do you want these types of decisions to be decided by Oklahoma legislatures? Defaulting to the Oklahoma state law for important LLC decisions could jeopardize your business as well as make things more complicated for you and you business partners, since you will have to look up Oklahoma statues every time you want to do something inside your business structure or management. If you don’t want the state to tell you how to run your LLC, it’s important that you have a well drafted LLC Operating Agreement that is personalized to fit your needs. By having an Operating Agreement in place, you can decide the rules that will govern your LLC’s inner workings, rather than having to follow state default rules that may or may not be right for your LLC.

One more short note is that an Operating Agreement is a private document, which the state  nor county does not need to have on file. It is held within your business documents, and only is seen by other parties if there is a lawsuit.

Protect your Limited Liability Status with an Operating Agreement

Even though the LLC Operating Agreement is not required to be filed with the state of Oklahoma, it is unwise to operate an LLC without an LLC Operating Agreement, even if you’re the sole owner of your LLC.

It is extremely important that you create an Operating Agreement to separate yourself as an individual from your LLC, even if you are the sole owner of your LLC. Without the formality of an Operating Agreement, the LLC can closely resemble a sole proprietorship, which does not limit your personal liability for business debts of the LLC. Without an LLC Operating Agreement, the basic operation of the LLC would then be governed by state law, which may not be advantageous to the LLC, it members, or the business it conducts.

The attorney of the Skillern Law Firm, PLLC can draft personalized Operating Agreements for your business needs! Call our office at to speak to our attorney today!

Important Considerations for Business Co-Founders to Consider

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New  businesses, or start-ups, often struggle later on its the business’s life due to how the business was originally set up or organized. This is more often a problem with businesses with more than one founder, since at one point or another, personalities and ideas will clash between the founders or later buy-ins. Too often, business co-founders will treat a new company like an exciting new relationship. The founders get excited about the new business, everyone seems to agree on everything, and then the business is founded without talking to an attorney, accountant, or any other business professional. The founders go out, start the business, and never discuss operating agreements, by-laws, or anything else that a professional would suggest. In the professional world, relationships that start in a frenzy, and without much consideration for the future, often end up in failure, and start-ups are no different.

First, before even consulting an attorney and/or accountant, it is very important for the co-founders to have a long and detailed conversations about their business, their working relationship, how to settle disputes in the future,and many other topics that they will have to deal with as the company grows. 

One of the people who knows this best is Dharmesh Shah, the successful entrepreneur and co-founder of HubSpot.  He recently published a list of the most important questions that co-founders need to resolve as soon as possible when starting a new business. 

 

After you talk to the other founders of the business, it is time for the business owners to consult an attorney and/or CPA. Every business and business owner is different, so a meeting with an attorney is important to discuss how to organize your business to fit your business present and future needs.. If you are in the process of starting a business, or have recently started one one (or never got around to creating an operating agreement), please call our office today for a free consultation about the needs to organize your business. 

If you are thinking about starting a business, these previous posts may interest you:

– Commingling of Business & Personal Funds (And Why It Is A Bad Idea

What is a Limited Liability Company?

What is a S Corporation?

Commingling of Business & Personal Funds (And Why It Is A Bad Idea)

Most business owners know to keep their business assets separate from their personal assets. However, there are many small business owners that do not. This is a bad idea, both legally and logistically.

If you have paid the money to an attorney or to the government to set up a business entity, whether a L.L.C. or Corporation, the last thing most people want to deal with is administrative problems and difficulties like separating bank accounts and assets. However, this is a very important step to keep the limited liability of your company in tact. In law, there is a business concept called “corporate veil,” meaning the liability shield between the business owner and the business. When you commingle your business and personal funds, creditors can “pierce the corporate veil,” and get into your personal assets through liability through your business. This the the main reason to avoid commingling your funds, although there are also tax reasons.

Today on Tulsa Estate Planning Blog, let’s discuss the legal reasons to not commingle your business and personal funds and the ways to avoid commingling.

How do you “commingle,” and what is “commingling?”
When you commingle your funds, you are treating your business funds as your personal money, whether buying or selling. Some of the most common ways to commingle are:

  •     Transferring money between business and personal accounts without documentation.
  •     Writing business checks for personal reasons/expenses, and vise versa.
  •     Having only one bank account for personal and business needs.
  •     Depositing business checks into your personal bank account.
  •     Withdrawing money from your business account to pay personal expenses without documentation.

It is very important to keep your corporate veil intact. As discussed above, when you commingle, your corporate veil can be pierced. Essentially, all the work that you did when forming the L.L.C. or corporation, such as filling the Articles of Organization, paying attorney or filing fees, and perhaps drafting the Operating Agreement, will be for nothing as far as limiting liability. Creditors can reach your personal assets if you commingle, and there in lies the problem with commingling.

How to avoid commingling.
First of all, the impulse to put your business check into your personal check is understandable for a small business owner. After all, you want to pay yourself and buy more supplies for the business to grow more. However, there are several reasons why  you need to deposit the check into the business bank account, and then pay yourself, and also buy business supplies out of the business account.

The first thing you should do is create a separate bank account if you have not already and document all expenses, withdrawals, and deposits. Documenting allows you to become a better bookkeeper for your business, and/or keep better records for taxes. Having better accounting by keeping separate bank accounts and only using business funds for business expenses can help you see how your business is performing, and seeing where you need improvement. It also allows you to keep your personal funds separate and helps create a personal budget since you will not be seeing business funds in your bank account.

Reducing Taxes.
One last benefit we will mention is the benefit to your taxes (and its easier for your CPA). One big benefit is that the IRS does not allow you to deduct business expenses that you cannot document. When you have one business account for personal and business expenses, it is hard to explain to the IRS what you need to deduct and for what purpose. The IRS is a lover of documentation, and by keeping track of your business income and expenses in its own business account is crucial to help minimize taxes and maximizing your deductions.

Many, if not most, small business owners pay more in taxes than they are required to because they do not have an organized system of keeping records and recording expenses. By simply creating a separate business account, and avoid commingling funds by using business money for personal expenses, you can create a more organized and efficient way to reduce liability and taxes.

If you need help organizing and/or creating your business, please contact the office of the Skillern Law Firm and see if we can help you.

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