Wednesday, September 7, 2011

Penny Wise Pound Foolish: Have a Lawyer Draft Your LLC Documents (Part 2)

On many occasions I have seen new businesses seek to save money by either copying an LLC Operating Agreement they found on the Internet or purchasing one from a website that is happy to sell you a form (while reminding you it is not a substitute for legal advice).  Guess what:  you get what you pay for!  The Operating Agreement should be a product of the discussions among the founding LLC members and the drafting attorney, and not simply a form found online.  An Operating Agreement is a contract, and other than certain rights/obligations as may be mandatory by the governing state statute, the terms can be varied as agreed by the members (owners). 

Today's example:  How/Who will manage and control the operations of the LLC?  If you are not careful, you could find yourself at the mercy of a partner who unfortunately fails on his/her initial promise to contribute to the business (time, money, etc), but still has the same management rights as you.

         1.  How is the LLC Managed:  LLCs can be:

              a. Member Managed:  which means each member has the right to manage the operations of the LLC and make ordinary business decisions.  Any member can, for example, bind the LLC to a contract -- although extraordinary actions still will require member consent.  Under New York law, for example, Member Managed LLC is the default provision unless altered by the Operating Agreement.

             b.  Manager Managed:  means that the Manager is a person who is appointed in the Operating Agreement or in a separate consent agreed to by the members (and the person need not be a member of the LLC).  In a manager managed LLC, the appointed manager can bind the LLC,
open accounts, etc. and not any one member.

        2.  Who is the Manager?  The Operating Agreement should set forth who will be the manager (as well as how he/she can be removed).  If you are the member investing all the time and money, then you likely want to be the manager.  Regardless, make sure a decision as to who will be the manager is agreed upon, and then stated in the Operating Agreement.

If you have any questions regarding drafting an Operating Agreement, please feel free to contact me.


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