Why Every Business Needs an Operating Agreement

At Sound Impact Law, we often get the same phone call — but it usually comes after things have gone sideways. A business partner stops communicating, money goes missing, or someone decides to leave the company. Then comes the question:

“We don’t have an operating agreement… what do we do now?”

The truth is, an operating agreement isn’t just a startup formality. It’s the backbone of your business relationship — the roadmap that defines how your company operates, how decisions are made, and what happens when things change. Whether your business is brand new or ten years in, a solid agreement can prevent confusion, protect relationships, and keep your business running smoothly when life doesn’t.

Client Stories We’ve Encountered

1. The Former Couple Turned Business Partners

Two business partners started their company while dating. Profits were shared informally, and expenses were paid out of a joint account. After the relationship ended, accusations flew — one partner was spending company funds on personal items, the other was trying to pull money out to “make things even.” Without an operating agreement, there were no guardrails or defined roles. What began as a shared dream ended in costly disputes and frozen accounts.

Lesson: Personal relationships can change, but business obligations remain. An operating agreement ensures that ownership, authority, and access to funds are defined from the start — no matter what happens personally.

2. The “Partner” Who Claimed to Be an Employee

In another case, two friends started a small business together. One was on unemployment and agreed they’d formalize things once the benefits ran out. That never happened. When tensions rose, the partner on unemployment claimed they were never an owner — but an unpaid employee — and filed wage and hour claims against the other. With no written agreement, the “intent” of the business relationship was left to interpretation, and both faced expensive litigation.

Lesson: Without written terms, even good intentions can backfire. A clear operating agreement defines who owns what, who gets paid, and how — preventing blurred lines that can trigger legal exposure.

3. The Partner Who Stopped Contributing

Three friends formed a company with the promise to contribute equally in money, time, and effort. Over time, one stopped showing up, stopped investing, and stopped helping — but still claimed a third of the profits. With no agreement outlining performance expectations, contributions, or removal rights, the others were stuck sharing profits with someone who wasn’t pulling their weight.

Lesson: A written agreement lets you set expectations for active participation, define what happens when a partner isn’t meeting obligations, and preserve fairness for everyone involved.

It’s Never Too Late to Get It Right

Many long-standing businesses operate on trust and verbal understandings — until that trust is tested. The good news: it’s never too late to put an operating agreement in place. Even if your company has been running for years, you can document how things truly function today, update ownership terms, and create procedures that match your reality.

A well-drafted operating agreement can:

• Prevent misunderstandings before they become conflicts.

• Clarify ownership, compensation, and decision-making authority.

• Protect your business if someone leaves, passes away, or loses capacity.

• Strengthen credibility with banks, investors, and future partners.

Building One That Works

Every company is unique — and so is every operating agreement. Templates you find online may skip critical details or create conflicts with state law. At Sound Impact Law, I work with business owners to create tailored agreements that reflect how they actually operate, not just how they should on paper.

Final Thought

Whether you’re launching your first LLC or running a thriving business that’s outgrown its handshake deal, don’t wait until it’s too late. An operating agreement is more than a document — it’s protection for your business, your relationships, and your peace of mind.