Benefits of an Operating Agreement in Virginia

There are many good reasons to structure your new business as a limited liability company (LLC). You can take advantage of a pass-through tax status to avoid double taxation on your profits, and you have generous protection from someone out to sue the company.

Starting a business features many components, such as managing the paperwork required by the state of Virginia and maintaining internal documents for financing and operational activities. Virginia does not require you to adopt a written operating agreement, according to the Code of Virginia § 13.1-1023; however, the attorneys at Earley Business Legal strongly recommend one. In this situation, the benefits of an operating agreement in Virginia far outweigh the potential risks that come with not having one.

The Mechanics of an LLC

An LLC can be owned by an individual, a group of individuals, other LLCs, corporations, or a trust. Members usually contribute start-up capital in the form of cash, real estate, expertise, or anything of value. However, if contributions are not identical, which they often are not, they must all agree on the percentage of ownership they represent.

Members vote on all issues according to their percentage of contribution, so a member with a higher percentage carries more weight when voting on policy and procedure.

Understanding Operating Agreements

Think of an operating agreement as an owner’s manual. Everyone involved should understand how the company works, including each member’s role, who makes financial decisions, and how disputes are resolved. It is also crucial to spell out what happens if a member defaults on a promise to contribute capital, wants to sell their interest, or if management disputes arise.

For instance, if a buy-sell arrangement is not included in an operating agreement, a divorcing member might find their business interest included in a property settlement. Virginia is an equitable division Commonwealth, which means the judges have considerable discretion to divide property fairly, and business interests are seen as marital property.

But even with a single-member LLC in Virginia, there are benefits to an operating agreement. It provides clarity to banks and operating partners, as well as protects business owners from lawsuits.

What Happens When You Fail to Adopt an Operating Agreement?

When members of an LLC argue and don’t have an operating agreement, a court may step in to dissolve the company, enforce something by injunction, or choose any other method of equitable relief the court deems is fair. This can affect members whose capital contributions are higher if the court cannot discern and allocate equal ownership interest to all members. This is why a great operating agreement will not only provide clear governance provisions but also guide members through dispute resolution in order to avoid expensive lawsuits that disrupt the company’s business.

Contact a Virginia Attorney About the Benefits of Operating Agreements

Our skilled attorneys are dedicated to providing the documentation you need to run a successful business. With our Handshake Portal, we work with you to craft LLC operating agreements to reach your goals and soundly protect your members. Contact us today to talk about the benefits of an operating agreement in Virginia.