Free Operating Agreement Template – Bad Idea!
A Free Operating Agreement Template doesn’t make anyone money, so you have to wonder why companies make them available? As a law firm, it probably wouldn’t surprise you to hear that we make most of our money in legal fights — when our clients are in a knock-down, dragged-out fight in litigation.
Some of our biggest cases hit $100,000 or more.
Contrast this with filing a LLC or Anonymous LLC. The starting price is only $199 plus filing fees — and the reason it’s so low, is we compete with the non-lawyer Internet companies out there. Everyone wants to spend as little money as possible to form a company — which makes sense, but don’t let that translate into spending more money later with a poorly written Operating Agreement.
Free Operating Agreement Templates can translate into Expensive Lawsuits Later
Here’s something you probably didn’t know regarding those expensive litigation cases: Most of those expensive cases involve partnership disputes between owners of a LLC or Corporation. We’ve written extensively about partnership disputes. Turns out, partnership breakups are as traumatic and expensive as a divorce. For marriages, a Prenuptial Agreement (or “prenup”) is that magical document you hear about in the movies, but most couples don’t create. For partnerships (especially involving LLC’s), they have a built-in “prenup” called an “Operating Agreement.” Learn more about important clauses for LLC Operating agreements here.
For those partnerships with a well-written Operating Agreement:
- Partnership disputes and separations are relatively easy to resolve.
- IRS audits (assuming financials are in order and taxes are properly paid) are passed without penalties.
- Partners experience few disputes, because everything is properly addressed in the Operating Agreement.
- Lawsuits seeking to “pierce the corporate veil” and hold partners personally liable are unsuccessful.
- It’s easy to regulate or modify bad behavior or hold a bad actor accountable.
- Ownership changes quickly and easily, when a partner dies or becomes incapacitated.
Contrast the above to partnerships utilizing a poorly written or ill-defined Operating Agreement:
- Partnership disputes and separations can become very costly lawsuits.
- Oftentimes, the business doesn’t survive (or becomes seriously damaged) when a fight develops between partners.
- IRS audits result in significant penalties and fines.
- Liability protection can be destroyed if the partners don’t follow the Operating Agreement in managing the LLC, exposing individual owners to the liability of the LLC.
- Animosity can grow and fester between partners, if one (or more) partner(s) takes advantage of ambiguities in the Operating Agreement.
- It is more expensive to bring on a new partner or bring on investment, because you end up having to redo the Operating Agreement to support the new partner or investor.
- If a partner dies or becomes incapacitated, the business either dies with the partner or becomes subject to a bitter fight and dispute between the other partners and the family of the deceased or incapacited partner.
A Free Template is No Substitute for a Well-Written, Customized Operating Agreement
In short, a well-written Operating Agreement that conforms to your business and how you conduct business, is the correct long-term strategy to reduce the costs and impacts to partnership disputes, IRS audits and third-party lawsuits attempting to “pierce the corporate veil” and hold you personally accountable.
Whether you have a sole member LLC, with no partners, or a multimember LLC, you still want a good, well-drafted Operating Agreement for your specific circumstances.
Here are just a few significant factors that influence how an Operating Agreement is put together:
- Sole Member versus Multi-Member.
- Member versus Manager Managed
- Tax status of the LLC: Disregarded, versus Partnership, versus S-Corp, versus C-Corp
- Possibility of deadlock and the need for a quorum
- Powerful majority owner versus protection of minority owners
Consider the tax status mentioned above: The tax status matters a lot, and each tax status requires a very different Operating Agreement. Your typical Free Operating Agreement Template will gloss over the tax status, but most templates will assume “Partnership”. You can verify this by searching for the word “Capital Account” (not “Capital Contribution”, that is okay) and/or any reference to Section 70x of the Tax Code (where 70x is 703, 704, 705, etc).
If you try to tax your LLC as a Disregarded Entity, S-Corp or C-Corp, you will have trouble later if you are ever sued by a third-party trying to go after you personally or if you are audited by the IRS.
The Couture Operating Agreement: Better than a Free Template
This is why we’ve put together a sophisticated, AI-based Operating Agreement tool. We call it the Couture Operating Agreement for LLC’s. For $29.95, you can obtain a high-quality, highly customized Operating Agreement for your business. This is a free service for clients who have us form a LLC or Anonymous LLC with us.