Every North Carolina LLC has an “operating agreement” – whether the members of the LLC know it or not. For the most part, the operating agreement, and not the LLC statute, determines how the LLC is governed. This self-determination is the key advantage of an LLC over a corporation. However, this also can be a big problem. The LLC statute says that the operating agreement can include, or can be comprised entirely, of “oral or implied provisions.” Therefore when there is no written operating agreement, then in the event of a dispute the operating agreement will be whatever the judge says it is. This is why every LLC needs a well-crafted written operating agreement.
How do you avoid having a judge get it wrong? The best way to ensure the judge gets it right is “must have” #1. You must have a good business lawyer prepare your operating agreement.
The second “must have” is asset protection, which is the “limited liability” in limited liability company.” The operating agreement should provide maximum asset protection; it is equally important to recognize the limits to “limited liability.” Your lawyer can explain how these relate to your business.
A third “must have” is clarity as to how decisions are made. If the LLC is to be governed by majority rule, are there limits to what the majority can decide? If there are two equal members, how will they resolve disagreements? Again, a good lawyer will anticipate and be able to resolve these questions in preparing the operating agreement
Fourth, the Operating Agreement must make provision for how expenses and revenues will be shared. These splits do not have to be in the same proportion as ownership interests. You can create any formula to be written into the operating agreement. Be certain to consult your tax professional about the effects of the rules you adopt.
The fifth and final “must have” is an exit strategy. Someday you may want to transfer your business or will depart this world and you will need to capture the value of your business. If the business you build has lasting value, a well-written operating agreement can help you reap that value for yourself or your posterity.
An operating agreement you download from the internet may do more harm than good. A business worth building is worth documenting correctly with an experienced business attorney who knows you, knows your hopes and dreams, and works to protect your best interest.
Author: Jesse Jones, Attorney
The McIntosh Law Firm, P.C.