Your operating agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in operating agreements and their remedies below.
The vast majority of the time, the problems in LLC operating agreements come down to language that is vague, irrelevant to your particular business situation, or ambiguous in any way can create real-world problems for your LLC.
Here are some common issues, along with examples of phrases to watch out for in your operating agreement.
LLC members must have a procedure for decision making. When an LLC has multiple members, some decisions may be made by majority. While you can specify unanimous consent under certain circumstances, clearly defining what constitutes a “majority” clarifies your agreement. Decide with your fellow members whether you want to define majority as a percentage of ownership or by number of members.
Another common problematic clause is one which states that any member may do business with the LLC absent any restriction. This can create issues if a member abuses this freedom. To avoid potential problems, specify that any member of the LLC must get majority approval before performing any transaction directly with the LLC.
These issues are particularly important for multi-member LLCs. When an LLC is formed, the operating agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?
Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good operating agreement keeps managerial powers in check in the following ways:
Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned real estate attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding operating agreement, but are more likely to overlook these nuances.
operating agreements are simply an example, albeit an important one, of the many documents that should be reviewed by a trained legal professional. Many prospective clients ask us if their local attorney will be sufficient for this. Most of the time, the wisest thing to do is hire legal counsel with specific experience creating LLCs for real estate asset protection purposes.
While any attorney is certainly better than no attorney, we recommend a skilled asset protection attorney who knows how to help investors like you. Because we have our own experience crafting deals and planning for worst-case scenarios, we draw on our experience as both investors and attorneys when counseling clients.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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