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Be Smart and Use an LLC Operating Agreement

Alan Borsen, CPA

June 14, 2017

When you form an LLC, you need to draft articles of organization that comply with the state’s LLC act and then file the articles with the appropriate state office. Typically, the required articles are broadly worded and likely don’t address members’ rights and responsibilities as you would like them addressed.

You should consider taking the extra step of having your lawyers create a written operating agreement. This agreement provides operational rules for running the business and can override or alter the default rules in your state’s LLC act to better meet your needs.

With the operating agreement, you

  • increase the LLC’s limited liability protection by making it more difficult to “pierce the veil”, because the operating agreement makes your LLC appear more business-like;
  • can prevent the unwanted dissolution of the LLC, which distributes the assets to the members with no LLC shield from creditors’ claims; and
  • can create the plans you need in case of death, divorce, or withdrawal.

It’s also nice to know that you can deduct the legal fees incurred to create the operating agreement. The rules allow you to deduct up to $5,000 in organization costs immediately and then amortize the balance over 180 months.

   

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