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Types of Businesses and Why They Need an Operating Agreement

Businesses come in many forms ranging from the simple one owner sole proprietorship to the more complex Limited Liability Company (LLC) or Corporation. Most states, Missouri and Kansas included, have simple requirements for the formation of the business entity. Many states have simplified the process of creating a business entity. Now all one needs to do is provide the Secretary of State’s office with a few details, usually by inputting this information on a website.

So, if our state doesn’t require an operating agreement to form a LLC, then why go to the expense of creating one?

The owners of the LLC are typically known as LLC Members. When there are two or more Members involved, known as a Multiple Member LLC (MMLLC), this question is easier to answer (because disagreements amongst people are not hard to imagine). The question becomes more difficult for a Single Member LLC (SMLLC), an LLC with only one individual Member.

SMLLCs are very susceptible to having their limited liability removed, as many times the single member does not fully separate the business entity from the private person. This is commonly referred to as the piercing of the limited liability veil. When this happens, an owner’s personal assets are exposed to the liabilities and creditors of the business. When a SMLLC has a valid LLC Operating Agreement the business is viewed as a legitimate, separate entity, strengthening the limited liability veil. In many ways, the SMLLC needs the LLC Operating Agreement to look more like a business.

Additionally, the SMLLC Operating Agreement allows the business to opt-out of state default rules with its own stated provisions within the operating agreement. The operating agreement can also create the framework for adding new Members, define the rights of any assignees of the LLC member interest and generally plan for business succession. In many ways, the operating agreement helps the SMLLC to be viewed as a true separate entity, thus better protecting the personal assets of the single Member.

Continue learning here: 9 Practical Things Every Operating Agreement Should Have