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LLC’S and Operating Agreements: Myths and Truths

Located in Tacoma servicing Puyallup, Tacoma and McMillin

There is a vast number of resources available to review before you consider starting a new company. Most are all free such as the Small Business Administration (SBA), The Service Corps of Retired Executives (SCORE), or the Small Business Guidance Washington, Small Business Guide, just to name a few.

Although, these resources will state that you need an Operating Agreement and all suggest that you consult with an attorney, and or accountant. Why is an Operating Agreement so Important? It is the legal document that creates the protections of owners and operators from being personally liable for the conduct and operations of their businesses.

The primary purpose of any operating agreement is to define how the business operates and who is responsible. The basic only difference between an LLC Operating Agreement and the Articles of Incorporation or Articles of Organization is that Operating Agreements does not just cover opening the business, but how and the conditions to close the business. Similar to Articles of Incorporation or Organization is it is the document that separates the owners, members, managers, interest holders, agents, or officers from the liability of being sewed while in the process of operating a business. Your operating agreement should basically include what is know as company bylaws that details out how you run your company.

A lot of new small company’s overlook the requirement to prepare an operating agreement. While others view the document as a legal requirement to meet and do not follow up in speaking to an accountant. It is always best to follow up with both, although there is no real requirement to hire either an attorney or an accountant to draft your document. In which case, the best resources are with the SBA or Score if you are considering drafting your own documents. Each state is different with different laws and requirements. It is imperative to at least have an understanding in your state’s laws and requirements. Why because some state will require you to submit your document to the appropriate state agency, usually the Secretary of State, others will not. Some require you have it by law, others do not, but will recommend that you have one. Such is the case in Washington State.

Why does Washington State not mention certain relevant facts? In Washington State an operating agreement is only recommended and is not required by law. Why because the state has default clauses for how to handle cases where there is not an operating agreement. I personally, would never allow the State to determine if I am personally liable for the operations of my business! Because there is no requirement to submit an operating agreement to the Secretary of State of Washington is another contributing factor as to why it is overlooked. Similar, the State Resource are not necessarily correct either. Where the one member LLC is typically taxed as an individual, known as a sole proprietor, and more than one member is typically taxed as a partnership. It leaves out the fact of Washington State being a mutual property state and that husband and wife can be considered as one or a sole proprietor to be taxed as an individual under joint returns.

Why else is the operating agreement so important. What if you and your spouse are operating your business and the spouse is on a job site helping you. You did not or forgot to put your spouse on the ownership or “Governor” application with the Secretary of State. The Department of Labor and Industries inspector sees you both working on the job site. They will question you as to the employment status and if you are both owners. The State Auditor will review your Secretary of State, Labor and Industries, and License filings. When they see your spouse is not on the filings, you are liable for them being what is considered a “Covered Worker” nicely redefined as employee. Unless they are designated on the Operating Agreement as a contributing owner with rights, voting and ownership, you will not be able to get out of the fines and penalties imposed for them helping on the job site. In other words, the document is the evidence that the missing name on the registration was an administrative mistake.

Author: Fred Pugaczewski, BC&FS

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