VIRGINIA LLCs - WHY YOU NEED AN OPERATING AGREEMENT

Whether you are in the process of forming a Virginia limited liability company (or “LLC”) or operating your business as an LLC, you need to have an “operating agreement”, which  is a written contractual document which sets forth the financial rights, obligations and duties of the members in an effort to reduce the possibility of future disputes.   What you may not know however, are the possible scenarios members could face if the LLC does not have an operating agreement or if the agreement does not adequately plan for unexpected circumstances. Unfortunately, Virginia law does not require an operating agreement and many people form LLCs without a written operating agreement.

Too often disagreements arise between members of an LLC over matters such as management, ownership interests, contributions, or profit allocations, when their prior verbal agreements are not reduced to writing.   Imagine the ill-fated  scenario where a fellow member initially promises to contribute money to get the business up and running,  yet he or she later refuses to make the  necessary contribution.  Under the Virginia Limited Liability Company Act a promise by a member to contribute to a LLC may be impossible to enforce unless it is set out in a writing signed by the member.   Thus the  amount of cash, property or services the members will contribute to formulate the capital for the LLC should be set forth in the operating agreement.

The operating agreement should not only address the financial operation of the entity but it should also speak to future  events such as membership transfers, the dissolution of the company and the possible death of a member.   Imagine the potential for confusion and dispute in the event a  fellow member were to pass away.  Would you feel entirely comfortable with that member’s child or spouse having the authority to make decisions for the company?  

As you can see it is important that the members of an LLC regularly meet to discuss both their mutual understandings as to the function and the future of the entity and its members.  Legal counsel should be consulted to advise members of the essential components of an operating agreement and to memorialize these agreements to writing.  When properly crafted, the  provisions set forth in an operating agreement can go a long way toward avoiding future disputes and uncertainty among members.

Email: lmooney@comptonduling.com