Law Office Report - Summer 2010
Business Owners: Benefits of an Operating Agreement
Attorney Keith J. Pilger
Limited liability companies ("LLCs") have become the most popular business entity of choice for small business owners. The popularity of LLCs is a result of the ease of formation and operation that these entities enjoy. LLCs offer all of the limited liability protection of a corporation without the corresponding formalities and also afford the members of the company all of the tax benefits of a partnership. Unfortunately, in some cases the ease of formation and operation of LLCs can lead to complacency that can have a significant impact down the road.
In many cases, when an individual decides to use an LLC as a business entity, he or she simply files the Articles of Organization on-line and does nothing further thinking that they are now protected by the LLC's limited liability shield. Unfortunately, it is not that simple. Unless the appropriate formalities are followed, the limited liability protection of an LLC can be avoided or "pierced" by a creditor or plaintiff in a lawsuit against the LLC (often referred to as "piercing the corporate veil"). If the corporate veil is pierced, the individual members of the LLC may be held personally liable for the LLC's debts and liabilities. In fact, Section 183.0304(2) of the Wisconsin Statutes specifically permits piercing of the LLC's limited liability shield in the same manner as Wisconsin courts have allowed the corporate veil of a corporation to be pierced where a lack of formality was present.
An operating agreement is an important factor in separating yourself as an individual from your LLC, even if you are the sole member of your LLC. An operating agreement governs the management of the LLC, the distribution of profits and losses, and all of the other internal operations of the company. Having an operating agreement for your LLC will help to ensure that a court will respect your limited personal liability. This can be particularly important in the case of a single member LLC where a lack of formality can result in the company starting to resemble a sole proprietorship, which offers no limited liability protection. Having a written operating agreement will provide credibility to your LLC's separate existence.
In addition to having an operating agreement, there are several other rules of thumb or best practices that, if followed, can help to ensure that the limited liability shield of your LLC remains intact. If you are considering forming an LLC or even if you have already formed an LLC but have not gone beyond filing the Articles of Organization, you should contact an experienced business attorney to discuss what steps you should follow and the documents you need to properly form your LLC to ensure that the limited liability protection the LLC affords will remain intact.