When starting a business, most people focus on the exciting parts, choosing a name, opening a bank account, getting customers, or building a website. However, one of the most important documents that protects the business and the owners is often forgotten:

The Operating Agreement 

An Operating Agreement is a legal document that explains how the business is owned, managed, and protected, especially when there is more than one member or partner involved

What Is an Operating Agreement?

An Operating Agreement is a written contract between the owners (called members). It explains:

• Who owns what percentage of the business
• How profits are shared
• Who manages day-to-day decisions
• What happens if someone leaves, sells shares, or passes away
• How disputes will be handled
• How voting works

It is basically the rulebook for the business.

Why It’s Important for Multi-Member LLCs or Partnerships

When a business has more than one member, things can go smoothly in the beginning because everyone is excited. But over time, disagreements can happen:

• Who makes decisions?
• What if someone stops working or contributing?
• What if one member wants to sell their interest?
• What if someone invests more money than the others?
• Who signs checks or contracts?
• How are new members added?

Without clear rules, small disagreements can quickly turn into major problems.

An Operating Agreement keeps everyone protected by answering these questions before something goes wrong.

Avoid Conflict & Misunderstandings

Partnerships often break not because the business fails, but because the partners were not on the same page.

Examples:

• One partner works full-time; another works part-time, who gets more profit?
• One member spends money without permission, is that allowed?
• Someone wants to withdraw money, should that require approval?
• A partner leaves the company, what should happen to their shares?

With an Operating Agreement, the rules are already written, and everyone must follow them.

Without one, the state decides for you, and that may not match what you want.

Protect Your Ownership & Liability

For LLC owners, having an Operating Agreement helps maintain your limited liability protection. It shows the business is separate from your personal life, which is important if there are legal or financial issues.

Banks, landlords, and lenders may also ask for your Operating Agreement to confirm:

• Ownership percentages
• Who is authorized to sign agreements
• Rights to open accounts or borrow money

Without one, you may face delays or risk the bank refusing to open an account.

Rules for Adding Members or Selling Interest

One of the most common partnership problems is ownership changes. An Operating Agreement can explain:

• How a new member can buy into the business
• How an existing member can sell their shares
• What happens if a member becomes disabled or passes away
• Whether the other members must approve new investors

This prevents strangers, ex-partners, or family members from taking ownership without permission.

Profit Sharing & Contributions

Members might not always contribute equally. One may bring:

• Money
• Equipment
• Skills
• Connections
• Time

Your Operating Agreement can explain how profits are divided fairly, based on:

• Work performed
• Capital investment
• Voting rights
• Management responsibility

This avoids resentment and protects every member’s contribution.

How Disputes Are Resolved

If members disagree, the Operating Agreement gives a step-by-step process:

• Voting requirements
• Mediation or arbitration
• Who has final authority
• How major decisions are approved

This helps avoid court battles, legal fees, and fighting between partners.

Better Than Verbal Agreements

Some people run a business based on trust and verbal agreements. But if a disagreement happens, verbal promises are:

• Difficult to prove
• Not enforceable
• Easy to misunderstand

A written Operating Agreement protects friendships, partnerships, and family relationships.

Final Takeaway

If you have:

• An LLC
• A multi-member business
• A partnership
• A business with investors

Then an Operating Agreement is not optional - it is essential.

It protects your ownership, clarifies responsibilities, prevents disputes, and ensures your business continues smoothly even during unexpected situations.

Need Help Drafting One?

At American Elite Tax, we help businesses:

• Form LLCs
• Draft Operating Agreements
• Set management and voting rules
• Plan profit distribution
• Add or remove members
• Protect each owner legally and financially

Whether you are starting a business or already operating without an agreement, we can help you set one up professionally.

📍 Oak Creek, Milwaukee, Franklin, Greenfield, Greendale

📞 414-335-4555

🌐 www.americanelitetax.com