What's Missing from Your LLC's Operating Agreement?

The Issue: Off-the-shelf Operating Agreements don't contain provisions to help resolve three common challenges. Owners will spend a lot of time and money negotiating or litigating resolutions.

Background: Business owners must answer three common questions about the operation of their business:

• How does the business fund its operations when it is not generating enough income?

• What happens if the owners can't agree on how to operate the business?

• What happens when an owner wants to exit the business, or when an owner wants to stop doing business with another owner?

Neither the law nor an off-the-shelf Operating Agreement answers these questions. 

Where will the business get the money it needs to operate if it does not generate enough income? By default, LLC owners are not required to contribute money to the LLC to make up for any shortfall.

Big decisions need to be approved by the owners. What happens if the owners can't agree (a deadlock)? Off-the-shelf Operating Agreements don't contain a process for resolving deadlocks.

Owning an LLC is not the same as being an employee. Owners can't resign from an LLC or terminate another person's ownership, so what happens when an owner wants to leave or wants another owner to leave? 

The Fix: Customize your Operating Agreement to answer these questions when you start your LLC. An experienced business lawyer can suggest answers and language to add to the Operating Agreement. Later, when a question arises, the owners can look to the customized Operating Agreement for the process to resolve it.

Next Steps: If your LLC has two or more owners, review your Operating Agreement to see if you can answer these questions. If you can't, then discuss these questions, agree on the answers, and revise your Operating Agreement to address them. Creating a process for resolving these challenges before they arise will save you time and money when you face them later.

Contact Me: Email (joel@jalawoffice.com) or call me (757-270-4088) for help answering these questions and revising your Operating Agreement.