Why You Need Professional Advice and an Operating Agreement For Your LLC

If you follow my other articles and writings, you know Ithe capital to start the business. Further assume that
have strongly suggested that businesses avoid theshe decides that a trusted assistant should have a
use of Internet forms or Internet-based documentsmall equity interest in the business, both as a reward
services. It is a fair rejoinder that, as a lawyer, I haveand an incentive to perform. Thus, the founder files the
an economic interest running counter to such services.LLC paperwork listing herself and the assistant as the
As a litigator, however, I have often had to try to cleantwo members.
up legal messes caused by homemade agreements,The founder may be surprised to find at a later date
misuse of forms, or, in some instances, the failure tothat, because there is no written operating agreement,
document agreements. Cleaning things up on the backshe and the assistant are, by Georgia statute, entitled
end, particularly through litigation, is always moreto equal votes in managing the business. O.C.G.A.
expensive. Further, cleanups rarely achieve the same§ 14-11-308(a)(1). In addition, the founder and the
results that could have been achieved by doing thingsassistant are entitled to equal profit distributions.
right on the front end. A specific example of thatO.C.G.A. § 14-11-403. The founder will also find, as
graphically illustrates the point is the need for ana consequence, that the assistant has the legal right
operating agreement for a limited liability companyeffectively to block anything the founder wants to do
("LLC"). In Georgia, LLCs are still a relatively new formwith the business.
of business entity designed to provide liability protectionIt may be possible, if the assistant is a reasonable
to the owners ("members") and flow through taxation.person, to clean this up at a later date by adopting an
Most business persons understand the need to form aoperating agreement that makes the assistant the
corporation, LLC or other entity to help protect theirminority equity holder and that allocates voting rights
personal assets. LLCs are easy and inexpensive toand profit distributions as was originally intended.
form. It is certainly true that an Internet service or aHowever, if there has been a falling out between the
business person acting alone can form an LLC.two members, or if they simply honestly disagree on
Unfortunately, many business persons assume that,what their respective rights should be, it can lead to a
once the LLC is formed, that is all they need to do.very difficult dispute.
This assumption can lead to unexpected andOf course, if the founder had consulted a lawyer in
unintended consequences.establishing the LLC, this scenario would have been
LLCs are designed to be highly flexible entities that canavoided. The issues would have been addressed in an
be adapted to the needs of the particular business.operating agreement, making the founder the manager,
This flexibility allows the members to enter into anestablishing the percentages for profit distributions, and
operating agreement that governs, among other things,dealing with many other issues.
how capital accounts will be established, how the LLCIn closing, please note that these are only a few of the
will be managed, how profits will be distributed, whatissues that can arise when business founders rely on
happens when the business is wound down.Internet services or try to act as their own lawyer. A
Absent an operating agreement, many critical issuesfounder should also discuss with a lawyer, for
will be determined by statute. Let's say, hypothetically,example, the basic issue of whether an LLC is the
that a business person establishes an LLC, coming upcorrect choice of entity.
with the business plan and strategy and contributing