Attorneys Stephen Korshak and Lee Karina Dani

Your LLC operating agreement horror story

On Behalf of | Mar 12, 2019 | Business Law |

When you read this article title, you breathe a sigh of relief. There will be no horror story about your LLC. You do not have an operating agreement; therefore, you have no horror story.

Unfortunately, you are not only wrong, you already have the material for chapter one.

Suppose you have three partners, and you agree that each of you will share a fourth of the business—in sickness and in health. As in most LLC relationships, you smooth out a few details and set sail in calm waters. You will be the executive partner, and the other partners will respectively be in charge of production, sales and accounting.

When an LLC partner wants to dissolve the marriage

You may have heard an LLC is like a marriage. If you believe the analogy, you could eventually regret that you skipped the prenuptial agreement when you ignored advice to create an operating agreement since Florida does not require it for an LLC. You know that businesses, no matter their type of formation, encounter rocky areas. As friends and partners, you trust each other. You collectively learn how to run your business, and you solve problems together. After many months, your profitable business has $140,000 in the bank.

Why an LLC operating agreement makes a difference

During a Monday morning business meeting, your sales manager abruptly states he has decided to move to another city and will no longer be with the company after closing time tomorrow. Stunned, you watch in disbelief as the sales manager walks out the door. The sales manager drives to the bank and withdraws $139,000 from your company business account, then moves to another state the same day.

You and your remaining partners scramble to salvage what is left of the business and consult a business attorney. He asks for paperwork covering your business activity, including the operating agreement. Sadly, you have the material for the rest of your horror story because there was no operating agreement to prevent the sales manager’s behavior.

Who prepares your LLC operating agreement matters

You should know that having an operating agreement does not make your LLC bullet-proof. There are horror stories of LLC losses you may hear from former business partners who obtained a generic operating agreement form on the internet or relied on a weak agreement drawn up by a standard practice. You and the two remaining partners decide to dissolve the existing company and start a new LLC.

Your new partnership agrees to obtain a strong legal operating agreement. The strength of your operating agreement depends on hiring a professional experienced in providing specific legal analysis to protect your type of business operations. Almost every operations difficulty your new LLC will face, including removal of an unsuitable partner or conducting a closure, can be effectively addressed by a well-constructed professional operating agreement.