Many LLCs in California are unfortunately started with downloaded forms off of legal websites. People just want to get their business up and running for the least amount possible. However, the second that your business starts to make money you have two really important problems: California law provides preference to the minority ownership position in all business legal ownership disputes unless your corporate documents specifically say otherwise (which forms downloaded from a website miss the vast majority of the time), and when any issue arises between the owners of an LLC an expensive and time consuming litigation is the only option to resolve it. The importance of an operating agreement for an LLC is that it properly establishes the priority of principle investors up front, and provides for valuation of a business interest in the event a major life event occurs or a dispute arises.
Accomplishing the important steps of carefully crafting the corporate documents including the operating agreement for an LLC is much easier when the business is in start-up. Everyone is excited, and all parties are working together in a productive atmosphere with the best interests of the business at heart. Its much easier to discuss challenging business questions when it is mostly “academic” and no one has any ax to grind or skin in the game.
Once the business is up and running and the money is coming in the relationships between the principles naturally change. Discussing how money will be divided becomes much more complicated. What happens in the event one of the members of the LLC dies or becomes incapacitated? There is no legal mechanism in place to establish a fair valuation of that member’s ownership interest. There are no corporate instructions or agreements for how that business interest is to be bought out. What happens in reality is the spouse of the disabled member comes in and tries to exercise the disabled or deceased member’s ownership interests, and inevitably a lawsuit breaks out.
The least amount of money, and one of the best investments you can make in your new LLC is to make sure your corporate documents including the operating agreement for an LLC are carefully crafted by the attorneys at Allen Barron. We have owned and managed many companies, and bring strong business expertise to the table. We guide our clients through many questions regarding the various challenges business owners face such as the addition of new investors (and how that will affect profit distribution), the valuation of a member’s interest if a divorce, bankruptcy or other major life event occurs.
If you are forming a new company we invite you to call 866-631-3470 for a free consultation. Ask about the corporate documents and the operating agreement for an LLC. The small investment you make today will not only help your business to run more effectively and profitably, it will avoid the expense and hassles of a lawsuit down the road. It isn’t a question of “if” it’s a question of “when.”
