LLC Operating Agreement
As a lawyer, however, I have frequently been called upon to clean up legal disasters that have resulted from sloppy agreements, incorrect use of forms, or, in some cases, a failure to properly document agreements. Cleaning things up after the fact, particularly through litigation, is usually more expensive than starting from nothing. Furthermore, cleanups rarely produce the same effects as they could have if the work had been done correctly from the start of the project. The requirement for an operating agreement for a LLC is a specific example that clearly illustrates the point.
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LLCs are a relatively new type of business entity that is intended to provide liability protection to the owners while also allowing for taxation to flow through to the owners. The majority of business owners realize the importance of forming a corporation, limited liability company, or other type of entity to help preserve their personal assets. LLCs are simple to set up and cost little money to do so. Undoubtedly, an Internet service provider or a businessperson acting on their own behalf can incorporate a limited liability company (LLC).
A common misconception among business owners is that, once the LLC has been formed, they are finished with their work. As a result of making this assumption, unexpected and unanticipated effects may occur. A limited liability company (LLC) is intended to be a highly adaptable entity that can be tailored to the specific needs of the business. Due to this flexibility, the members can engage into an operating agreement that specifies, among other things, how the LLC will be founded, how the LLC will be managed, how earnings will be split, and what will happen if the firm is closed down at the end of the year. Several essential aspects will be determined by statute if an operating agreement is not in place.
Take, for example, the hypothetical situation in which a business owner forms an LLC, develops a business plan and strategy, and provides the necessary funds to get the company up and running. Assume further that she determines that a trustworthy assistant should be granted a tiny stock stake in the company as a reward and an incentive to work well. As a result, the founder files the LLC papers, naming herself and the assistant as the two members of the company. This situation may be remedied at a later date if the assistant is a reasonable individual and an operating agreement is adopted that designates the assistant as the minority equity holder and assigns voting rights and profit distributions in the manner originally planned.
A really tough conflict, on the other hand, can arise when the two members have had a falling out, or if they just differ on what their individual rights should be. It goes without saying that if the LLC’s founder had sought legal advice prior to forming the company, this problem would have been averted. All of these concerns could have been resolved under an operating agreement, which would have appointed the founder as management, established the percentages for profit distributions, and dealt with several other issues. Finally, please keep in mind that these are just a few of the concerns that might occur when business owners rely on Internet services or attempt to operate as their own legal counsel. There are many more. A founder should consult with an attorney on a variety of issues, such as whether or not an LLC is the best choice of entity for his or her company.