Why Every Michigan LLC Needs an Operating Agreement—Even if the Law Doesn’t Require It
A Common Oversight That Could Cost You
Many business owners in Michigan assume that filing Articles of Organization is all they need to establish an LLC. However, one of the most crucial documents—an operating agreement—is often overlooked. While Michigan law doesn’t mandate it, not having one can lead to serious legal and financial consequences.
What is an Operating Agreement?
An operating agreement outlines the structure, responsibilities, and financial arrangements of an LLC. It ensures that members have clear expectations regarding ownership, decision-making, management, profit distribution, and dispute resolution. Without one, your business will default to Michigan’s generic LLC laws, which may not reflect your intended arrangements.
Unlike Articles of Organization, which are filed with the state, an operating agreement is an internal document that governs the way your business operates. Think of it as a contract among members that provides clarity, legal protection, and flexibility.
The Risks of Not Having an Operating Agreement
1. State Default Rules Take Over
Michigan law includes default provisions that dictate voting rights, profit distribution, and member withdrawal. These rules may not align with your business goals. For example, by default, profits and losses are split equally among members, which could be unfair if contributions were unequal.
2. Personal Liability Risks
Without a formal agreement, your LLC may appear less legitimate, potentially exposing personal assets to lawsuits. One of the primary reasons for forming an LLC is to limit liability, but an informal or poorly structured LLC can weaken that protection.
3. Internal Disputes & Deadlock
If an LLC has multiple members, disagreements can lead to business paralysis if roles and decision-making processes are not clearly defined. In the event of a 50/50 partnership, the lack of a defined deadlock dispute procedure can cause significant legal battles and expense.
4. Difficulties in Selling or Transferring Membership
Without an operating agreement, selling ownership shares or bringing in new partners can be legally complex and contentious. The lack of predefined exit strategies can leave businesses in limbo if a member wants to leave.
How an Operating Agreement Protects Your LLC
A well-drafted operating agreement provides:
Clarity on Ownership and Management – Defines who owns what percentage of the business and how decisions are made.
Flexibility – Allows members to structure operations to fit their needs, rather than relying on Michigan’s default laws.
Legal Protection – Strengthens liability protection by formally separating personal and business activities.
Dispute Resolution – Establishes clear rules for handling disagreements, member withdrawals, disability, death, divorce, and voting deadlocks.
The Right Legal Professional Makes All the Difference
It’s essential to have an experienced business attorney draft your operating agreement rather than relying on a CPA/accountant or even worse a DIY Operating Agreement. CPAs are invaluable for financial strategy, but they are not business attorneys. Just as you wouldn’t ask a mechanic for tax advice, you shouldn’t rely on an accountant to draft a legally binding contract that governs your business operations and legacy ownership interests.
Protect Your Business & Avoid Legal Headaches
An operating agreement is not just a formality—it’s a safeguard for your business and financial interests. If you formed your LLC without one, it’s never too late to draft one with the guidance of an experienced business attorney.
Far too often, we see bright-eyed entrepreneurs with successful businesses get completely derailed by a bad business partner. What starts as a strong partnership can quickly dissolve into disputes over finances, control, and vision. Memories fade, perspectives change, and disagreements arise. By getting everything in writing while all parties are in agreement, you create a safeguard against future conflicts. A well-drafted operating agreement can mean the difference between maintaining a thriving business partnership and having an irreparable falling out. It could even mean the difference between a full house during the holidays or an empty one.
At Abraham Law, we help business owners in Genesee, Oakland, Livingston, Shiawassee Counties, and throughout Michigan protect their LLCs with customized operating agreements. Contact us today for a free consultation.
If your LLC doesn’t have an operating agreement, don’t wait until a dispute arises. Contact Abraham Law today for a free consultation and ensure your business is legally protected.
📞 Call us at 810-750-0440 or visit our website: https://www.abrahampc.com/business-llc-corporate-law-matters
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