If you haven’t drafted an LLC operating agreement, you’re going to want to talk to a business lawyer as soon as you can. What’s an LLC operating agreement, and more to the point, what exactly is an LLC, you say? I’m glad you asked. Allow me to begin with a story.
A former Coast Guard Lieutenant Commander—let’s call him Steve—wanted to start a business. After a distinguished career in the military, Steve decided to retire from the armed forces to pursue a less stressful occupation. He had been running a logistics operation for several years when an old friend told him about an opportunity shipping dietary supplements for doctors who wanted to sell them on their websites. His friend—let’s call him Mark—was a doctor himself. With their combined experience, contacts, and understanding of the market, it was a surefire way to establish a solid business. Or so Steve thought.
What is an LLC?
They decided to set up their business as a co-owned LLC, short for Limited Liability Company (and it’s a good thing, too, as you’ll soon find out). After hiring a business attorney to help with the legal side of starting a business, they got to work.
Unlike a General Partnership, an LLC does not allow one co-owner of the company to be held liable for another’s commitments, such as contracts or business deals, which, if breached can put assets and capital at risk.
Business was booming for the shipping company, so much so that it eventually started to become a burden for Steve. About six months into running the business, Steve started to notice a pattern. It seemed that every time he needed help with an order or wanted to discuss the operation of the business, he couldn’t find Mark anywhere. When he finally confronted his partner about the unequal workload and lack of communication, Mark came clean. He told Steve he had gotten caught up in his medical practice and couldn’t devote the time and effort he had promised when they set up their company.
What Is an LLC Operating Agreement?
Steve decided to talk to their business lawyer again to see what he could do. When they sat down with the attorney, he suggested that they draw up an LLC operating agreement (something he should have done in the first place). But even after they followed the attorney’s suggestion, they ended up shutting things down because of their differences, not to mention a breached contract from a bad deal that Mark had made without Steve’s knowledge (good thing it was an LLC—no liability for Steve). Had they drafted an LLC operating agreement as soon as they formed the business, things might not have ended the way they did.
Essentially, an LLC operating agreement lays the ground rules for a business. A well-crafted agreement covers everything from the naming of the business to how profits will be divided. But in this instance, what would have helped Steve and Mark the most would have been the sections that cover the responsibilities of each partner and how they would manage the company. Why? Because these portions of the agreement lay out division of labor, decision making authority, and other details of day-to-day operation. The business lawyer handled these elements poorly from the beginning.
Alternative to Co-Owned LLC Organization
Hindsight is 20/20, but we can learn from the mistakes of others. In the end, Steve and Mark probably would have been better off choosing a different way to organize their LLC—perhaps an LLC owned and operated by Steve with Mark as a paid subcontractor or investor.
What Can a Business Lawyer Do for My LLC?
Do you need legal business advice to help your Florida Limited Liability Company thrive? Call Gonzalez Law. Whether you need help deciding on a business structure, drafting agreements, or protecting your interests, we will put our expertise to work for you. Make us part of your team from the start.
Need a review of your business? Contact us today for a no obligation consultation. Se habla español. 305-858-4512