If you’re forming or already own an LLC in South Carolina, you may have come across the term “operating agreement.” If you have, then chances are you’re wondering whether it applies to you. And if you haven’t, well, it’s time to take a minute to consider the importance of one and whether you need it.
In a nutshell, an LLC operating agreement is a document that details how your company will be run. What are the rules and regulations? Who owns what? How does the money work, and how will you resolve disputes as they arise? Your operating agreement answers all of these questions and more, so that should things go off track, you’ll still have some ground rules.
South Carolina does not require LLCs to have an operating agreement, though, which leads many new business owners to believe they don’t need one. That, sadly, is not the case. You’re much better off with operating agreement in hand, so let’s take a look at what it is, why it matters, what it includes, and how to get one.
An operating agreement outlines how you, and any other stakeholders, will run your company. It details information such as:
The operating agreement may detail information beyond this, depending on what you and other key members want it to include. However, these are the basics, and having them in place really matters.
The main reason to put an operating agreement in place is your own protection. Businesses start with the best of intentions, but they may grow beyond their initial assumptions. When that happens, you want to make sure everyone is still on the same page and the company has guardrails in place on which all agree — in the case of multi-member LLCs.
It’s a good idea for single-member LLCs to have an operating agreement in place as well, because then you know what to do if stressful situations or big decisions come up. You will already have guidance from your past, unstressed self, as well as professionals you consulted, about how to proceed.
An operating agreement also helps create more distance between your finances and the LLC’s. In the case of a legal dispute in which the LLC may be required to make restitution, you want your personal finances sharply divorced. Otherwise, plaintiffs may try to come after your home or other personal assets.
If you don’t have an operating agreement, there is still a legal dispute resolution channel in South Carolina through which your case will go. However, once you’ve entered into the dispute without an operating agreement in place, you’ve lost an opportunity to set ground rules with the other members or stakeholders of your LLC while relations were still good.
Lacking such positive relations now, you must rely on the state’s default regulations regarding LLC disputes, which may not align with how you want to do things. To which the state will respond: Too bad. You’re stuck with it now.
So just how do you draft one?
Let’s take a deeper dive into the content contained within your typical South Carolina LLC operating agreement, which typically include the following sections and questions to ask.
First and foremost, what form will your LLC ownership structure take? Are you the only member? Are there multiple members? Will everyone own the company evenly? Or did you contribute different amounts of capital and will own it in different percentages?
Who will do what at your LLC? How will you change responsibilities when you need to?
How will you vote on big decisions? Do the votes of some people outweigh those of others? Can everyone express their opinion on every topic, or are there restrictions? How will you make big financial decisions? What if someone disagrees?
How will you distribute profits? Are they split evenly? Who gets to claim company losses, and in what amount? (Note that claiming losses can provide a significant tax advantage, so this is important.)
If you no longer want the company, how will you dissolve it? If some members do and some don’t, how will you buy them out? Can the company be transferred, and if so, how?
These questions can prevent a world of heartache down the road. Make sure you ask them and any others that are pertinent to your business. But generally speaking, you are allowed to put anything in your operating agreement that is not:
Drafting an operating agreement is a relatively simple process, but it’s not necessarily easy to get it right. Legal experts have a depth of know-how that lay folks just can’t replicate, no matter how educated you are or good at what you do. It isn’t a matter of pride, but rather of ensuring you and your investment are well protected for years (or decades!) to come.
To write up your operating agreement, the best idea is for you and your fellow members, if applicable, to see professional help. A lawyer or other legal professional knows exactly what the document should contain and can help you plan for circumstances that you may not be able to foresee right now.
Plus, they understand any rules that are applicable to South Carolina and can help you understand them.
South Carolina-Specific Considerations
While operating agreements are largely standardized across the United States, there are rules specific to each state. In South Carolina, you should be aware that lacking an in-place agreement, you will be subject to South Carolina’s specific laws vis-à-vis dispute resolution, company dissolution, ownership transfer, and so on. These rules are found in SC Code § 33-44 of state law.
South Carolina’s state law is not conducive to membership arrangements that are unevenly split. In multi-member LLCs where this is the case, it’s even more strongly encouraged that you form an operating agreement. The state’s standard guidelines regarding membership roles and responsibilities are also limited, so if you want more nuance in legal proceedings, you should outline and get agreement on it now.
Operating agreements, while not required at the state level, are still sometimes required by lenders and financiers. You can draft one at any time, of course, but it’s expedient to have one on deck already before you ask for funding.
Remember, it shouldn’t much to draft an operating agreement, and the results could be invaluable to your LLC in the end. If you don’t want to worry about the fate of your business down the road, an operating agreement is an excellent safeguard to put in place.
So, what are the next steps? Simple. All you have to do is talk to a professional online LLC formation service, like us. Will walk you through the process of putting this document together immediately.
No, you are not required to have an LLC operating agreement in South Carolina. However, it’s always a good idea to map out how you will run your company and handle disputes in future, especially if you are not the only stakeholder.
You can write your own operating agreement, but if you want the best results, it’s important to have an expert write it or at least look it over. It’s a legal document, so those with no formal training aren’t best suited to creating an ironclad operating agreement.
If you don’t have one and you must resolve a dispute legally, South Carolina will follow its default rules. While the outcome is likely to be fair, it may not align with what you were hoping for – or had verbally agreed to – as a company.
Single-member LLCs, like any other type, are not required to have an operating agreement. Nevertheless, it’s always a good idea to make a plan for how you will handle operational, financial, and legal situations down the road, even when your business is still nascent.
Once you draft an operating agreement, you should store it in several locations. Keep a file on your computer and in the cloud, and keep a hard copy somewhere safe, like a safe at home or a safety deposit box at the bank.
This portion of our website is for informational or educational purposes only. Tailor Brands is not a law firm, and the information on this website does not constitute legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos on this page.
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