Why should a Utah LLC have an operating agreement?

A Utah 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.

Utah state law does not require LLCs to adopt a written operating agreement. However, any good lawyer will recommend that you create a written operating agreement as one of the first actions of starting your Utah LLC.

1. Your operating agreement proves you own your LLC.

Utah allows you to protect your privacy when starting an LLC by not requiring that you list members’ or managers’ names on the Utah Certificate of Organization or annual renewal. However, this can make it difficult to prove who owns the LLC, which you may need to do in order to open a business bank account. This is when an operating agreement is useful. Most banks will accept an operating agreement as proof that you own your LLC.

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

To maintain limited liability status, you must be able to show that your LLC is a separate legal entity from its owners. Following the rules and procedures outlined in your operating agreement helps you to demonstrate this legal separation. A well-written operating agreement will be a great tool to have if your LLC is ever served with a lawsuit.

3. An operating agreement can help prevent misunderstandings.

LLC members are unlikely to see eye-to-eye on every single issue. But by referring back to what you’ve already agreed upon in the operating agreement, you can head off conflicts and get back on the same page.

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

Any processes not covered in your operating agreement will be governed by Utah’s default LLC statutes. These statutes might not be best suited for your business. An operating agreement will give you more freedom in how you run your LLC.

Utah 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 Sumsion v Bay Harbor Farm LC, where the members’ disorganization, including their failure to actually adopt and maintain an operating agreement, opened the door to extensive and expensive litigation. Besides experiencing failure to launch as originally intended, the LLC operations faltered, followed by some members experiencing friction. One member attempted to dissolve the LLC but failed to conclude and wind up LLC affairs. Instead, the member continued to operate under the LLC’s name until a third party was injured, resulting in exposure of the LLC disorganization.

“The Sumsion case is an excellent example as to why it is important to plan ahead, discuss potential pain points, and distill the collective understanding into a written operating agreement. Valuable resources could have been preserved had the members of the LLC taken the time to do that very thing.”