Why do I need an Operating Agreement for my LLC?

There are two key documents with regards to forming an LLC in Wisconsin. The first is the Articles of Organization, which is filed with the Wisconsin Department of Financial Institutions (WDFI). The second is the Operating Agreement, which outlines the agreement between the members (which could be thought of as the “partners” in the business.)

What purpose does the Articles of Organization serve?

The Articles of Organization is what is needed to actually create and register your LLC with the State. It is in effect putting the world on notice that you have created a separate and distinct entity, and as long as you follow the rules to ensure liability protection (see “Are you actually getting the personal liability protection from your LLC or Corporation?“), if there is any dispute regarding the business, it is between that person and the LLC, not the members personally.

What purpose does the Operating Agreement serve?

This document is what I describe as the internal agreement between the members. It sets out all sorts of important things such as

  • who owns what percentage of the LLC?
  • What percentage vote is needed to make certain decisions? (ie- hiring and firing, borrowing money, signing contracts, etc.)
  • What happens if a member dies, or gets divorced, or files bankruptcy and a trustee is looking to take over their assets?
  • How is the sale price of the membership interests determined?
  • When can someone sell their interests? To whom?
  • Do the other members get the right of first refusal?

A well drafted operating agreement will address a myriad of other issues that are best to be resolved in advance and in writing.

As has been mentioned in many articles on this website, it is always best to make sure your agreements are in writing before a dispute arises (See “Anatomy of a Contract“). An operating agreement, if properly drafted, will serve two purposes. One, it will help avert any potential disputes because the parties will have addressed some of the stickier issues associated with business ownership in advance, and two, in the event of a dispute, it will aid the parties in resolving said dispute as hopefully it will address the very issue at hand.

While getting the LLC filed with the WDFI is great, and creates the liability protection between the members and the public, a well drafted Operating Agreement is equally as important as it protects the members from each other. Halling & Cayo S.C. offers flat rates for many business formation services, if you have any questions be sure to call and ask for Attorney Sean M. Sweeney.

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