Nicolas C. Oehler
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The Importance of an Operating Agreement for Every Ohio LLC
Forming a Limited Liability Company (LLC) in Ohio provides business owners with a flexible structure and strong personal liability protection. However, many entrepreneurs, especially those forming single-member LLCs, overlook one of the most important components of LLC governance: the Operating Agreement. A well-drafted Operating Agreement is essential for protecting personal assets, clarifying management authority, and avoiding costly disputes.
Under Ohio law (R.C. 1706.081), an Operating Agreement serves as the LLC’s internal governing document, defining the rights, responsibilities, and procedures of its members. Although it is not filed with the Secretary of State, it plays a critical role in directing how the company operates and resolving issues that statutory default rules do not adequately address.
Understanding the Operating Agreement
An Operating Agreement is a contract among LLC members that governs key aspects of the company’s operations. It typically includes provisions on:
Member roles and authority – ownership interests, voting rights, and managerial duties
Allocation of profits and losses – outlining how income and expenses are shared
Transfer and buyout rules – how membership interests may be sold, gifted, or inherited
Dissolution procedures – steps for winding up the business if it closes or members depart
If an LLC does not adopt a written Operating Agreement, Ohio law defaults to the provisions of R.C. Chapter 1706, which may not reflect the parties’ expectations or business needs.
Legal Framework in Ohio
Ohio’s LLC statute sets out basic rules for forming and operating an LLC:
R.C. 1706.01–1706.31 – Creation, powers, and general administration
R.C. 1706.081 – Recognition of Operating Agreements as the primary governance document
R.C. 1706.24 – Default rules for member-managed vs. manager-managed structures
Without an Operating Agreement, several defaults apply:
Every member has equal voting power, regardless of capital contribution
Profits and losses are allocated based on contributions
The LLC is presumed to be member-managed
These defaults often conflict with how members actually intend the business to operate.
Why Every Ohio LLC Should Have an Operating Agreement
Even a single-member LLC should have a written Operating Agreement. Key benefits include:
Protecting the Liability Shield
Courts may “pierce the corporate veil” if the LLC is not operated as a distinct entity. A written agreement shows that the business follows formal governance, strengthening personal asset protection.
Clarifying Management Authority
The agreement defines who manages the business, how decisions are made, and what actions require a vote, reducing internal conflict.
Establishing Profit and Loss Allocation
Members can set custom rules that differ from statutory defaults.
Handling Member Changes
Admission, withdrawal, death, disability, or buyouts are addressed in advance to avoid disputes.
Planning for Dissolution
Proper procedures for winding up protect members and reduce legal exposure.
Common Problems When No Operating Agreement Exists
LLCs operating without an agreement may face:
Statutory defaults that contradict member intent
Disputes over ownership percentages or voting rights
Difficulty obtaining financing or investors
Heightened risk of losing liability protection
Increased likelihood of costly litigation
Ohio courts often see disputes stemming from the absence of a clear, written agreement.
Drafting an Operating Agreement in Ohio
Important provisions to include:
Management structure (member-managed or manager-managed, R.C. 1706.24)
Capital contributions and ownership percentages
Profit, loss, and distribution rules
Voting rights and decision-making procedures
Transfer restrictions and buyout terms
Dissolution and winding-up procedures
Amendment process to ensure the agreement evolves with the business
Single-Member LLCs: Why an Agreement Is Still Essential
A single-member Operating Agreement:
Reinforces the LLC’s separate legal identity
Supports personal liability protection
Provides clarity for lenders and investors
Facilitates succession or transition planning
Practical Business Benefits
Beyond legal compliance, an Operating Agreement strengthens business operations by:
Building investor confidence
Satisfying banking and financing requirements
Supporting effective succession planning
Preventing misunderstandings and disputes
Best Practices for Ohio LLCs
Execute the Operating Agreement immediately after formation
Update it whenever ownership or management changes
Maintain a signed copy with your corporate records
Conclusion
A well-drafted Operating Agreement is the foundation of a strong and legally sound Ohio LLC. It protects personal assets, clarifies internal authority, ensures smooth financial operations, and prevents avoidable disputes. Every LLC, specially single-member entities, should adopt a comprehensive Operating Agreement tailored to the business and compliant with Ohio law.
Disclaimer: This post is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Every situation is unique, and you should consult with qualified legal counsel before making decisions regarding your specific business or legal matter.
