As an owner of an emerging LLC, your sights may be set on winning contracts with big clients, negotiating contracts with servicers and vendors, and even on the ultimate goal of an acquisition agreement from a larger company to purchase your company. But, for the time being, your LLC’s most important contract is the one that it has between its members: the operating agreement.
You may already know that as an LLC you are required by law to have an operating agreement. A quick Google search will lead you to countless “free” and cut-rate operating agreement templates. While filling in blanks on a downloadable form is certainly easy (and cheaper), the challenge for your LLC is to create an operating agreement that clearly spells out the members’ rights and responsibilities specific to your business and that anticipates developments and disagreement for the years to come. Below are a few of the major issues that have to be addressed in creating your LLC’s operating agreement.
How Will Your LLC Divide Profits?
Your operating agreement should clearly state how profits and losses should be allocated among the members of the LLC, as well as provide a framework for how and when those profits should be distributed to members. Talking about money can always be challenging when building a business with friends and people you trust. At the beginning you just want to focus on making money, but when the money starts coming in there are often problems that arise between the partners. Working with a third-party attorney to figure these issues out at the outset – before you’ve devoted months of work into the LLC – can be hugely helpful. Countless times it saves businesses from getting ugly and businesses getting dissolved. Similarly, figuring out who will pay for debts should things go south will prevent you from being left holding the bag without financial help from your fellow members.
Who Will Have What Responsibilities In Your LLC?
You probably have an informal allocation of responsibilities already, but it is important to memorialize these responsibilities on paper. Again, this can feel awkward and unnecessary in the early days of the company. But your business partners are likely to be faced with life events, babies on the way, money problems, family issues, divorce, or health problems. That’s when partners find themselves distracted as the company progresses, leaving the other partners to pick up the slack, so it is important that you have a legally binding document setting out your respective responsibilities should a dispute arise later and how to resolve those disputes.
How Will Decisions Affecting the LLC Be Made to Avoid Partner Disputes?
When your LLC does not create an operating agreement spelling out how decisions will be made, state will impose default rules on your LLC. These rules may not reflect the decision-making process you had in mind, and there are numerous LLC state rules regarding such issues as mandatory annual meetings and notices that must be provided that you may want to waive out of, but you can only do so with a valid operating agreement indicates you can. If you want a partner to leave the business or you want to leave the business, how do you go about that? By having a well-crafted operating agreement that not only dictates how decisions will be made, but also anticipates future challenges you might face (e.g. how an acquisition offer will be handled by your LLC or how a member can sell or assign their share of the business), you can reduce internal headaches going forward and streamline your LLC for success.
Legal Guidance in Creating Your LLC
At The Gouchev Law Firm in New York, we work with businesses of all sizes, including start-ups across New York City and New Jersey, in all aspects of business formation. 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.