Virginia has enacted laws governing limited liability companies (LLCs). Many of the rules defer to a company’s operating agreement, which memorializes how the owners (members) wish to conduct business. But what if the company does not have a written agreement in place?

Virginia does not require LLCs to have a written or even oral operating agreement in place, but you should consider a written one for many reasons. A Virginia operating agreements lawyer can explain the benefits of this crucial document and help draft one that suits your specific needs. Speak with the skilled attorneys at Sparks Law to learn more about the legal necessities when starting an LLC.

What is an LLC Operating Agreement?

Limited liability companies offer many advantages because they are flexible. Members are permitted to choose either the default pass-through tax status of a partnership, doing away with double taxation, or a corporate tax status with different advantages. Members’ assets are exempt from being attached or seized if the LLC is sued or owes money. Paperwork is minimal compared to a corporation. So, if an operating agreement is optional, why should members adopt one?

An operating agreement sets forth the rules, facts, and philosophy of a limited liability company. It is a tool to ensure that any future misunderstandings or disputes between members will be addressed in the document. Operating agreements address various matters, such as:

  • Members’ contributions, including money, goods, or services
  • What percentage members own and the allocation of profit and loss
  • Duties members are expected to perform, and their degree of power in making decisions
  • Who manages the business and how
  • How a member can join or leave the company
  • How the company will be dissolved

An operating agreement should also address the tax status, what happens when a member dies, and what happens if a member is not living up to bargained for obligations.

Benefits of an Operating Agreement

Oral agreements may seem sufficient when forming a business, but when misunderstandings arise in the future, emotions can trump reason. Fighting partners, even family members, can end up in court to battle it out. The Virginia court has the power to dissolve an LLC that reaches an impasse in litigation. An operating agreement drafted by a seasoned Virginia lawyer is a crucial step in protecting LLC owners from disputes down the line.

In the Absence of an Operating Agreement

Virginia law is clear that operating agreements prevail if they do not violate any state laws. However, under the Code of Virginia § 13.1-1028, LLCs that do not have a written operating agreement must maintain a repository with all pertinent company documentation, including a written statement describing the members’ contributions and the value when they were made. The statement must also include any future contributions members agree to make and if any member is to receive some or all the contribution back as a distribution.

Because paperwork requirements are not stringent, it would be easy for members who have not adopted a written operating agreement to forget to document this critical information for a repository. Problems arise when the members dispute contributions and nothing is in writing.

Dangers of Not Having an Operating Agreement in Virginia

Say that Member A contributes $50,000 in cash, Member 2 contributes a piece of land valued at $10,000, and Member C contributes services by agreeing to manage the LLC. Member A is supposed to own two-thirds of the LLC, and Members B and C split one-third.

The members did not adopt an operating agreement, and the repository was not created. Member B later claims that the parties were to split ownership equally, and the land contributed is worth $50,000 at today’s prices. In court, with no evidence and unresolvable disagreements, a judge could split the LLC assets equally to the detriment of Member A.

To avoid this situation, LLC members should meet with a skilled local attorney to draft an operating agreement. This critical document can prevent future problems when disputes inevitably arise.

Call a Virginia Operating Agreements Attorney Today

Your new limited liability company has may benefits, including significant flexibility and few filing requirements. However, once you file your Articles of Organization, you should consider adopting an operating agreement as a roadmap to success.

A Virginia operating agreements lawyer at Sparks Law can help draft a document to suit your business needs and prevent problems down the line. Call us today to learn how we could work to secure your future success.