• Legal, Startups

You form your Arizona limited liability company and begin planning the next steps. A quick online search indicates that you need an operating agreement. At that moment, every new business owner faces an important choice.

Hire an attorney to draft your operating agreement — or skip past GO, keep your $200, and find a quick fix online. One option saves money today but causes problems later.

In this article, I will cover everything you need to know about operating agreements. I will explain why you need one and why working with a knowledgeable attorney matters.

What Is an Operating Agreement?

An operating agreement is a document signed by the LLC, its members, and its manager (if the LLC is manager-managed). At its core, the agreement sets out how its members run the company. It covers how the business makes both day-to-day and financial decisions.

At a minimum, an operating agreement should cover:

  • Voting rights
  • Powers and duties of members and managers
  • Percentage of member ownership
  • How meetings are held
  • Transfer of ownership

Is the Operating Agreement the Same as the Articles of Incorporation?

No. Your articles of incorporation are what the Arizona Corporation Commission (ACC) returns to you after your entity is registered. If you did not draft the articles yourself, the ACC’s standard form will include your business name, principal office, registered agent, and the date the entity started.

An operating agreement is much more detailed. It can run from 5 pages to 60 pages, depending on how complex your LLC’s operations are and what your members want. That is why speaking with an experienced attorney about drafting or updating your operating agreement is so important.

It is also worth noting that your articles of organisation can include certain restrictions that interact with your operating agreement — another reason to review both documents with legal counsel.

Why Does an LLC Need an Operating Agreement?

The operating agreement exists to help members create rules for running the business internally.

Without one — or with one that lacks key terms — the Arizona Limited Liability Company Act steps in. That is not always a problem. But the Arizona LLC Act does not always protect business owners the way a custom agreement would.

For example, the Arizona LLC Act may defer to your operating agreement. This lets members decide how to run the business and set aside the default statutory rules. Without a solid agreement in place, you lose that flexibility.

Read: 10 Legal Documents Every New Business Should Have

Who Needs an Operating Agreement?

Every business owner needs one — full stop.

Even if you are a single-member LLC, you should have an operating agreement. It is not only useful for managing disputes between multiple members. It also serves as the place where you record key instructions for what happens if you pass away or become incapacitated.

For instance, do you want the LLC to keep running without you? Or would you prefer a trusted friend or family member to wind down operations and dissolve the entity?

Running a business is a long-term commitment, much like starting a family. Plan for your present, your future, and the things that could go wrong along the way.

Action Steps for Your Business

If you do not have an operating agreement — or yours needs updating  Nocturnal Legal can help. Contact Nocturnal Legal to create a new operating agreement or to have your current one amended and restated.