The Hidden Costs of Not Having an Operating Agreement

A Legal Must-Have for LLCs

Starting a business is exciting, and forming a Limited Liability Company (LLC) is a common choice for small business owners due to its flexibility and liability protection. However, many LLC owners overlook a critical legal document—the Operating Agreement. While Oregon and Washington don’t legally require LLCs to have one, skipping this document can lead to costly disputes, legal headaches, and even business failure.

Let’s explore what an Operating Agreement does and why not having one could cost you more than you think.

What is an Operating Agreement?

An Operating Agreement is a legal document that outlines how an LLC will be run, including ownership structure, member roles, decision-making processes, and financial distributions. It serves as the internal rulebook for your business, setting expectations and preventing disputes before they arise.

The Risks of Operating Without One

1. State Default Rules May Not Work in Your Favor

Without an Operating Agreement, your LLC will be governed by Oregon or Washington’s default LLC laws. These one-size-fits-all rules may not align with your business’s unique needs. For example, default laws often assume equal ownership among members, which could cause issues if one partner has invested more time or money than the others.

2. Ownership Disputes Can Get Messy and Expensive

Without a written agreement, disagreements between business partners can quickly escalate. Who makes major decisions? What happens if one owner wants to leave or sell their share? If these questions aren’t answered in an Operating Agreement, disputes could lead to costly litigation—or even force the business to dissolve.

3. Financial Conflicts Can Destroy Your Business

An Operating Agreement should specify how profits and losses are distributed. Without it, conflicts can arise over how much each owner is entitled to, especially if some members contribute more work than others. Financial disputes are one of the top reasons businesses fail, and having a clear agreement in place can prevent misunderstandings.

4. Protecting Your Limited Liability Status

One of the main reasons entrepreneurs choose an LLC is to shield their personal assets from business liabilities. However, operating without a formal agreement can blur the line between personal and business affairs, increasing the risk of “piercing the corporate veil.” This means that if your LLC is sued, courts may hold you personally liable for business debts—defeating the purpose of forming an LLC in the first place.

5. No Plan for Transitions or Exit Strategies

What happens if a business partner wants out? What if a member passes away? Without an Operating Agreement, your LLC may have no clear plan for transferring ownership, leading to confusion, disputes, or forced dissolution. A well-drafted Operating Agreement can outline buyout terms, succession plans, and dispute resolution methods to ensure the business continues smoothly.

How to Create a Strong Operating Agreement

A well-drafted Operating Agreement should cover:
✅Ownership percentages and voting rights
✅Member roles and responsibilities
✅Decision-making processes
✅Profit and loss distribution
✅Buyout and exit strategies
✅Dispute resolution procedures

Even if you’re a solo business owner, an Operating Agreement is still valuable. It clarifies how your LLC will operate, which can be helpful for securing business financing or in case of future changes, such as bringing in new partners.

Don’t Wait Until It’s Too Late

An Operating Agreement isn’t just a formality—it’s a crucial legal safeguard that protects your business from unnecessary risks. If you don’t have one in place, now is the time to create one before a dispute or financial conflict arises.

Need help drafting an Operating Agreement tailored to your business? Contact my firm today for a consultation. Let’s make sure your business is built on a solid legal foundation!

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This article is a service of Dolev Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

Disclaimer

The information provided in this blog is intended for general informational purposes only and does not constitute legal advice. Overtime pay laws, salary thresholds, and other employment regulations are subject to change, and their application can vary depending on specific circumstances and jurisdictions. We recommend consulting with a qualified attorney or human resources professional to address your specific legal needs or compliance questions. This blog should not be relied upon as a substitute for personalized legal advice. Reading this blog or contacting our firm does not establish an attorney-client relationship. If you need assistance with employment law compliance or other legal matters, feel free to reach out to us to discuss your specific situation.