Why should a Oregon LLC have an operating agreement?

An Oregon 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.

OR Rev Stat §63.057 (2019) states that an operating agreement (“if any”) can be oral or in writing. However, just like you wouldn’t build a house and skip laying the foundation, you shouldn’t build an LLC and skip writing the operating agreement.

1. Your operating agreement proves you own your LLC.

Oregon gives you the option of not listing all your members’ names on the Articles of Organization. Taking advantage of this will help you protect your privacy, but it could also make it difficult to prove to a bank, landlord, or potential investor that you actually own your LLC. With an operating agreement that lists all your members’ names and addresses, you can prove your ownership when you need to.

2. An operating agreement can help reinforce your limited liability status.

In order to maintain limited liability status, an LLC must be able to demonstrate that it is a separate legal entity from its owners. This is why LLC owners follow formalities like managing their business finances in a separate business bank account. This is also why it helps to have a written operating agreement that documents the rules and procedures your LLC follows. If your LLC is ever taken to court, a written operating agreement is a legally binding document you can use to support your case. A verbal operating agreement is difficult to prove, so it has less power.

3. An operating agreement can help prevent misunderstandings.

There may come a time when your members can’t agree on an important matter. That’s when it helps to consult your operating agreement, which covers how you will proceed in a range of situations.

4. An operating agreement can override Oregon’s default laws.

An operating agreement gives you more control over how your LLC functions. If you don’t adopt an operating agreement, your LLC will be governed by Oregon’s default LLC laws. Your operating agreement lets you override these default laws and run your LLC in the way that works best for you.

Oregon 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 Sherwood Park Business Center, LLC, where a member’s financial desperation drove him to divert LLC resources for his own purposes, thereby breaching his fiduciary duties to the LLC and the other members and compromising the financial status of the LLC. The desperate member attempted to shield his situation by assigning his interest in the LLC to another LLC formed specifically for that assignment of interest. Fortunately for the other members, this bad faith member failed to adhere to the assignment procedure spelled out in the LLC’s operating agreement, thereby invalidating the bad faith member’s attempted transfer and preventing that member from escaping accountability for his bad acts.

“Because the members of the LLC in Sherwood Park adopted and maintained an operating agreement, the courts were easily and consistently able to side with members against the bad faith member and his improper actions. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”