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1. Feature: After Year One: Review and Edit your Operating Agreement (4 min)

2. From the Archive:

   • The Trouble with Handshake Deals

   • Who Really Owns Your LLC When You’re Gone

   • Changing Registered Agents in Florida & Wyoming

3. Dear TCoL: Choosing Whether I Now Need an LLC 

-TCoL

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The first-year tests a young business the way a tide tests a boat — it reveals every weak joint.

Most LLC operating agreements are signed at formation and never revisited. That is risky. The first version is usually written for a simple business, not a growing one.

Don’t have an operating agreement yet for your LLC? Then read our previous article, Your LLC Is Missing Its Most Important Document, to get started on one.

Year one changes the facts. Money starts moving in meaningful amounts. Responsibilities shift. The company begins to accumulate assets, obligations, and history. When the agreement stays frozen, ambiguity grows, and ambiguity is where partner disputes begin.

The job of the operating agreement

An operating agreement is the rulebook among owners. It should answer at least three questions:

1. Who can do what for the company, and with what approval.

2. How money is contributed, tracked, and distributed.

3. What happens if an owner wants out, stops working, or becomes a problem.

Formation-stage agreements often touch these topics lightly. That can work when the business is small and trust is high but it can fail when the stakes rise.

Why “we get along” is not a plan

Most owner conflicts are not about fraud, they’re about mismatch. One owner feels they carry the business. Another believes equal ownership means equal economics. Both may be acting in good faith.

If the agreement doesn’t define the economics or the exit path, the company ends up negotiating its rules in real time, under stress. That’s expensive and emotional. The right time to revise is when things are going well, not when tensions run high.

The highest-risk areas to update

Not every issue is equally urgent. The biggest exposures involve money and exit rights.

1. Capital contributions and capital accounts
This is often the first fracture point. Owners sometimes contribute in uneven ways — one writes checks, another skips salary, someone pays a vendor personally, another makes a loan but calls it equity in conversation.

If the agreement doesn’t say what counts as a contribution, what’s treated as a loan, and how each owner’s capital is tracked, disputes erupt once profits appear or a buyout is discussed. A year-one update should clarify definitions, set approval rules for new capital calls, and specify record-keeping.

2. Buyout terms and transfer restrictions
If an owner wants out, the agreement should make the process clear. Key terms include who can buy, how value is determined, how payment is made, and how long the process takes. It should also state what happens upon death, disability, divorce, or bankruptcy.

Without clear mechanics, separation becomes negotiation under pressure, and pressure produces bad deals and feelings.

3. Distribution policy
Once profits appear, distribution becomes the most common recurring argument. The agreement should define when and how distributions occur and address tax distributions when earnings are retained. Owners taxed on income but denied cash will not remain patient. A clear policy prevents repeat fights.

4. Authority and role changes
Many operating agreements assume equal participation. Reality changes. One owner becomes the operator; another becomes passive. Authority should reflect that shift. If it doesn’t, the operator bears the workload while the passive owner holds veto power, a setup that rarely lasts.

Define management authority, voting thresholds for major decisions, and who can bind the company.

5. Deadlock provisions
When ownership is 50-50, deadlock is predictable. The only variable is whether you planned for it. Deadlock provisions might include escalation steps, mediation, arbitration, or a buy-sell mechanism. The method matters less than having one.

When to revisit your agreement

Consider reviewing and updating your operating agreement whenever any of the following becomes true:

• Members have contributed different amounts after formation.

• The business has meaningful profit or retained earnings.

• The company takes on debt or larger contracts.

• A member’s role changes materially.

• You admit a new member or award equity incentives.

• A member wants to reduce involvement or relocate.

These are not legal milestones, they’re risk milestones.

What a first-year update should accomplish

An update should not be ornamental. It has two jobs:

1. Reduce ambiguity around money.

2. Make separation orderly if one day it becomes necessary.

If your agreement already covers those two things clearly, you’ve done the essential work. A business that survives its first year is worth protecting, and an operating agreement is one of the few tools that protects the business from the owners themselves.

If the company has grown up, the agreement should too.

Dear TCoL: Choosing Whether I Now Need an LLC 

Question: I have my business up and running and doing OK. At what point do I need to form an LLC for it? I am beginning to get a bit worried about personal risk but I do have business insurance.

Answer: You likely need one now, but first let’s cover some basic information and then ask yourself a few questions to make sure.

An LLC’s primary purpose is simple: it separates your personal assets from business liabilities. If the company is sued, the claim is against the company. Your home, savings, and personal investments are generally protected, provided you maintain proper separation and operate the entity correctly.

Insurance does not replace that protection.

Insurance covers defined risks, subject to policy limits and exclusions. Claims can exceed limits. Coverage can be disputed. An LLC addresses personal exposure beyond the scope of a single policy. Used together, they create layered protection.

The practical question is this: if a serious claim arose tomorrow, would you be comfortable defending it personally?

You do not need large revenue to face meaningful liability. A contract dispute, customer injury claim, or regulatory issue can arise in an otherwise ordinary year. If your business signs contracts, interacts with customers, or generates income that matters to your household, personal risk exposure is real.

Cost is rarely the barrier. In most states, forming and maintaining an LLC is modestly priced and administratively manageable. The discipline it requires, including separate accounts and clean records, is good operating practice regardless.

Timing does matter. Forming an LLC after a dispute arises does not shield prior conduct. If you are already concerned about personal exposure, that is usually an appropriate time to act.

There is one additional protection many small business owners overlook: a personal umbrella policy.

A personal umbrella policy sits on top of your home and auto coverage and provides additional liability limits, often in $1 million increments. The cost is typically low relative to the protection offered.

Why include this in the discussion?

Because risk is not neatly divided between business and personal life. A serious auto accident, an incident at your home, or a situation that blends personal and business activity can threaten personal assets. An umbrella policy provides inexpensive excess coverage that strengthens your overall protection.

If you operate through an LLC and maintain appropriate business insurance but leave your personal side thinly covered, you have addressed only part of the risk.

So, when do you need an LLC?

When your business is active, ongoing, and capable of creating obligations that could materially affect your personal assets and finances. If you are beginning to feel uneasy relying solely on insurance, that is a rational signal.

Form the entity. Maintain appropriate business coverage. Add a personal umbrella policy.

Businesses grow and risks grow with them. A sensible LLC structure keeps that growth from endangering everything else you have built personally.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!