Top 3 Reasons NOT to Use a Form Operating Agreement

August 24, 2021

1. The Agreement MUST suit your company and the actions your company will take

No two companies are alike in every way, so no two operating agreements should be the same.  The operating agreement for a single member LLC that conducts the business of pet grooming in San Antonio will NOT look like the operating agreement for a single member LLC dentistry practice in Waco.  They will be the same in a number of ways, because business is business generally speaking.  However, certain things in your operating agreement will reflect the kind of business you are conducting and the level of growth or liability you intend to incur.  The member buy-in for a medical office will be a much more structured and detailed process than the investment opportunity process for new members of an office management company.

2. Not following the Agreement will subject you to shareholder lawsuits

If your operating agreement requires that annual meetings be held at a certain time of year and certain time of day, then you MUST hold an annual meeting at the appointed time and at the appointed place.  Any requirements in your operating agreement that are not followed, place you in “noncompliance” and subject you to lawsuits from shareholders as well as expose you to personal liability for the liabilities of the LLC.  Using a form operating agreement you found on a random Google search or borrowed from a friend greatly increases the risk that you will sign an operating agreement that obligates you to perform some task that there is no reason you would think to perform.

For example, some operating agreements for larger LLC’s have requirements for yearly accounting and audit programs for the LLC finances, debts, obligations, outstanding shares, and share buyback provisions.  For a larger corporate office in downtown Houston, this would be a necessity and a great provision that would keep all the members and shareholders up to date on the complicated business of the company.  This provision would NOT make sense for a single member LLC set up to provide bookkeeping services in rural South Texas by a single accountant.  But if the accountant uses the operating agreement with this provision, they will be obligated to perform this task according to the provisions of the agreement, or be in noncompliance.

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Nathaniel Gilbert is the sole attorney at The Law Office of Nathaniel Gilbert, PLLC. Practicing in the areas of Real Estate and Business, Nate serves the states of Texas, Colorado, and Kansas. He can be reached at 726-999-0087.