LLCs are widely recognized to be “creatures of contract,” meaning that, for the most part, you get to dictate the terms under which your company will operate. For those without a legal background, drafting a contract may seem like a daunting task, and, as a result, many people make the mistake of simply copying an Operating Agreement template without considering what terms might most matter to the success of their company.
Customizing your Operating Agreement is crucial to protecting your business interests. One of the key provisions you want to consider including in order to protect your company is a non-compete clause.
What Is a Non-Compete?
A non-competition clause, often simply called a non-compete, is a provision in your Operating Agreement that prevents an employee of the company from engaging in similar business that directly competes with the company. In most instances, the non-compete takes effect upon termination of the employment relationship.
Typically, non-competes are designed to protect sensitive business matters, such as confidential information, trade secrets, or goodwill, by preventing former employees from disclosing such information to third parties. They also often prevent former employees from soliciting the company’s clients or customers, or hiring the company’s employees.
Courts closely scrutinize non-competition agreements. In order to be deemed valid, they must be narrowly tailored to protect legitimate business interests, and must set reasonable scope, time, and geography limitations for the conduct being prohibited. Essentially, a non-compete cannot be so sweeping or broad that it unreasonably prevents former employees from securing future employment.
Why Do You Need One?
Confidential information and trade secrets are the lifeblood of many businesses. Employees who have intimate knowledge of your company’s inner workings have serious potential to undermine your success and destroy any competitive advantage you may have.
Without a clear non-compete in your Operating Agreement, your employees will essentially have free reign to compete with your business once they leave the company. Because most members of an LLC have extensive knowledge of the company’s most critical information, the failure to prevent competition could be the death knell of your business.
Most LLCs are started by a small group of people who have full trust and confidence in one another, and in many cases, are even friends or family members. It’s tempting to want to believe that you’ll never run into disputes with these people. The reality is, though, that business disputes arise every day due to circumstances that are entirely unforeseen. Like all relationships, business relationships are unpredictable, and the only way to prevent a conflict or impasse down the road is to address it from the start in your Operating Agreement.
Chances are you put far too much time and effort into getting your company off the ground to risk having its future undermined by events that are preventable. Non-competes are a simple way ensure that your business interests are protected down the road.
Legal Guidance in Building Your Business
At The Gouchev Law Firm in New York, we work with businesses of all sizes, including start-ups and franchise businesses. Call us at (212) 537-9209 or schedule a free strategy session today to see what The Gouchev Law Firm can do for your business.