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Wednesday, December 4, 2013

The Number One Problem for Small Limited Liability Companies

McGrath and Spielberger represents small & medium-sized businesses and their owners. 
The number one problem for small limited liability companies, based on McGrath & Spielberger's representation of small businesses and their owners, may be the lack of an Operating Agreement, also referred to as an "OA". Here are three examples of common situations in which the lack of an OA can be devastating to a limited liability company and its members.

1) The members have a disagreement that they cannot resolve, but there is no OA that sets forth the agreed upon method of settling such disputes.
2) One member isn't contributing properly to the LLC but there is no OA which establishes the consequences of failing to act in the company's best interests.
3) The LLC, or at least some members, want to add or remove members, but there is no OA setting forth whether the company can do so and how.

We create LLCs for clients, we prepare customized Operating Agreements for LLCs, and we generally provide the types of legal services that small to medium sized LLCs want and need. Of course, while we appreciate the business, we find it unfortunate that so many companies (and their owners/members) have had to come to us to ask for legal services and representation due to the lack of an OA. Had those same business owners hired a qualified attorney earlier in time, the lawsuits may have been avoided. We understand that everyone is very busy, and that it can be difficult to set aside the time and resources needed to get your company properly set up, but do you really want to risk endangering the business you've worked so tirelessly to create?

Any of the three scenarios above can lead to the LLC members reaching an impasse, can increase the likelihood of a lawsuit, and may ultimately cause the LLC to be dissolved. Even if the situation doesn't get quite that bad, failing to set up the rules by which the LLC will be governed can result in wasted time, energy, and money, resources which should and would otherwise be dedicated to further building the company and increasing its chances of success.

If an LLC does not have an Operating Agreement, the state's Limited Liability Company Act will generally control. However, most states' LLC Acts are very basic; they may not address the situation you find yourself in, or it may be that you simply don't want the generic default rules to be the ones which apply to your company, which has its own specialized needs.

In this regard, a limited liability company is like most other things in this world: if you do it right from the ground up - which takes a little extra effort - you can create something which is built to last and to whether life's storms. 

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