Why should a Washington DC LLC have an operating agreement?
A Washington DC LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.
The ground rules for operating agreements in Washington DC are covered in DC Code § 29–801.07, but the statutes don’t actually state that a Washington DC LLC must have one. However, you will need an operating agreement to maintain your LLC. Here’s why:
1. You’ll need an operating agreement to open a business bank account.
After you file your Washington DC LLC Certificate of Formation, you’ll want to open a bank account for your business. Why? Your LLC only has limited liability if it can prove it’s a separate entity from its owners. Mixing personal and business spending erodes this separation, so it’s crucial to open a business bank account and keep your business finances separate. When you head to the bank, you’ll need to bring a copy of your operating agreement.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability status, business owners must be able to show that their company is its own legal entity, distinct from its owners. One way to do this is to open a business bank account and keep spending separate. Another way is to create (and follow) an LLC operating agreement.
3. An operating agreement can help head off misunderstandings.
People aren’t always on the same page. (We’re all only human, after all.) But having an operating agreement that establishes rules and procedures for your company can help prevent minor snags from becoming major problems down the road.
4. An operating agreement can override Washington DC’s default laws.
Without an operating agreement, your LLC will automatically be governed by Washington DC’s default LLC statutes. The problem is that these default laws might not work for your business. Creating an operating agreement for your LLC ensures that you’re able to run your company (within the law) in the way you see fit.
District of Columbia Case Law
We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*
“Consider the case of Holman v Gentner, where a withdrawing member of a Professional LLC of lawyers went from being owed a substantial sum of money from her firm to owing money to her firm following her notice of intent to withdraw. To the credit of the PLLC members, they did adopt and maintain an operating agreement, however a dispute about how to interpret a specific provision of the operating agreement ultimately emerged. Naturally, litigation ensued between the withdrawing member and the PLLC. Looking to the operating agreement of the PLLC, the DC Court of Appeals noted the importance of giving the literal interpretation to clear and unambiguous provisions within an LLC operating agreement.
“Assuming good faith on all parties involved, had the members thoroughly discussed the provisions of the operating agreement (and its amendments) in detail and ensured the language matched the shared understanding, this dispute could have been internally resolved (if not avoided entirely), and valuable resources could have been preserved for more fulfilling commercial purposes.”
What is included in a Washington DC operating agreement?
According to DC Code § 29–801.02 (10), an operating agreement can be “oral, in a record, implied, or in any combination thereof.” But verbal agreements are flimsy and won’t hold-up in court. A written operating agreement is essential, and should include information about:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Bookkeeping procedures