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Attorneys, You’re Not Exempt: Why Your Firm Needs an Operating Agreement

Just like any other business, your law firm needs an operating agreement.

Perhaps the biggest danger of failing to have an operating agreement is that without one, default state regulations will govern the business, sometimes with unintended consequences. One of the most critical things an operating agreement does is to define the structure of the business. For example, many states define LLCs as member-managed by default, whereas it’s often desirable to have the LLC structured as manager-managed.

A member-managed LLC typically gives equal rights to each member in state regulations, whereas in many law firms some members may have a larger decision-making role than others, a fact that can and should be reflected in the operating agreement. An operating agreement should also specify how the management is determined, including procedures for resignation, the circumstances under which a manager might be removed, and the voting procedures for determining who manages.

Voting procedures in general need to be defined. Does each member have an equal voting share? Are there any limitations on voting rights for either members or managers?

Income sharing is obviously critical for any business, and this is another area where it’s wise to have the specifics spelled out in an operating agreement rather than defaulting to state regulations. State regulations will usually dictate an equal distribution among members, not necessarily the most rational distribution method for the typical law firm.

State laws change, and a business that was set up with an eye to current state laws may become outdated if it doesn’t have an operating agreement that covers all contingencies. It’s always a good idea to have an operating agreement that’s going to last, and then to review it regularly to ensure it is holding up to the changing nature of your law firm. A good operating agreement is a very important document for ensuring your business is structured so as to protect the rights of the members and so as to permit your law firm to function just the way you envision it functioning. Give us a call today at (305) 431-5678 to learn more!

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