Why should a Virginia LLC have an operating agreement?
A Virginia 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.
According to VA Code § 13.1-1023 (2019), an operating agreement isn’t actually required in Virginia—and if you have one, it “need not be in writing.” But don’t be fooled. Having a strong operating agreement—on paper—is essential for your LLC. Here’s why:
1. Your operating agreement proves you own your LLC.
You aren’t required to include the name of all (or any) members of your LLC when filing your Virginia Articles of Organization—which is great for privacy, but isn’t so helpful for showing proof of ownership. This is where your operating agreement comes into play.
Your operating agreement includes the names of all LLC members, which means you can use it to show you own your business. You’ll need it to open a business bank account.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability status, you must take certain steps to show your LLC is its own legal entity separate from its owners. One way to do this is to open a business bank account for your company finances. Another way is to create (and follow) an operating agreement.
3. An operating agreement can help head off misunderstandings.
Virginia’s state code states that “a limited liability company is bound by its operating agreement,” which means members are obligated to follow the rules and procedures it lays out. Should an argument or misunderstanding arise, those written rules and procedures should nip it in the bud.
4. An operating agreement can override Virginia’s default laws.
Any Virginia LLC without an operating agreement will automatically be governed by default statutes in the Virginia Limited Liability Company Act. The problem is that Virginia’s default laws might not fit your company. Adopting an operating agreement ensures you can operate your business (within the bounds of the law) in a way that works for your LLC.
Virginia 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 Cotton Creek Circles LLC, where a dispute among the members led to an arbitration proceeding and subsequent ruling which allowed a member to seemingly continue with a separate business opportunity that the other members believed to be explicitly against the adopted operating agreement. Ultimately, the courts sided with the arbitrator, upholding the propriety of the member’s separate business opportunity over the discontent of the other members.
“The Cotton Creek case is an excellent example of the importance of clearly expressing and stating the members’ intent in an operating agreement. Assuming good faith on all parties, had the members thought ahead and thoroughly discussed the permissibility for members to engage in non-competitive yet geographically proximate business endeavors, both litigation and arbitration could have been avoided, and valuable resources could have been preserved for more fulfilling purposes. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a Virginia operating agreement?
Technically, an operating agreement can include anything (within the law) not already covered by Virginia’s statutes. But a strong 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
- Management
- Compensation
- Bookkeeping procedures
- Dissolution
