Know the Law: As a Family Business, Do We Really Need an Operating Agreement?

Amelia E. Elacqua
Associate, Corporate Department
Published: Union Leader
September 1, 2019
Insights - Featured Image - Corporate

Q: I have successfully run my business as a single member limited liability company for years. My daughter recently purchased part of the business and now insists that we have an operating agreement. Is that really necessary?

A: While not required by New Hampshire law, an operating agreement sets out how the members of a limited liability company (LLC) will operate the business, resolve disputes and protect you and your daughter as owners in a variety of situations, so why would you not want one?

Beware the default rules: If you do not have an operating agreement, the New Hampshire LLC law prescribes certain default rules that apply to the operation of an LLC, and more importantly, to the owners’ rights and responsibilities. These default rules may not reflect your intentions or result in what is best for your business. An operating agreement takes priority over New Hampshire’s default rules, enabling you to control your relationship with other members and the operation of your business.

Death and taxes: An operating agreement allows you to address life’s challenges such as death, divorce or incapacity in advance, kind of like a will for your business. You probably aren’t leaving to chance who gets your grandmother’s silver, so why not plan for the future of your business?

As a single member LLC, you didn’t need to think much about taxes. But now that you have two members you can be taxed as a corporation or as a partnership. The operating agreement documents how the business is to be taxed, and ensures that the members comply with the requirements for such taxation.

Flipping a coin is not enough: While flipping a coin may resolve the debate of what to have for lunch, it is not an effective way to run a business. What happens if you and your daughter disagree on how much compensation you each should receive from the business, or who should control business decisions? Setting procedures for dispute resolution before there is an issue can avoid costly litigation and ensure that your business survives even the most heated disagreement.

The enemy of my enemy: Do you want to be in business with an ex-spouse, creditors or someone you just can’t stand? An operating agreement enables members to choose who they want to be in business with by setting limits on when, how and to whom membership interests can be transferred. An operating agreement can also prevent disputes over how the business will be valued when new investors are brought in or old members are bought out.

An operating agreement is essentially like having an owner’s manual for your unique business. Your attorney can draft an operating agreement that addresses your particular needs and ensures your intentions are properly reflected. Good luck!