Important Clauses You Had Better Have In Your Operating Agreement!

I have sat with clients who brought me “boiler-plate” internet Operating Agreements that they found on “Free Online Legal” sites. I find myself forced to peruse through pages of impertinent clauses and must inform the client that it would be in the interest of their time and finances that I draft the Agreement from scratch, rather than trying to amend and redress potential snags. Rarely is a canned document or form sufficient and advisable.

An Operating Agreement sets out the guidelines for how your LLC will be governed. Inside the pages of the principal agreement are important clauses that show how Members of the LLC intend to handle distributions (everyone wants to get paid), disputes, responsibilities, and other tremendously vital agreed-upon terms.

This is why it is important that your Agreement be prepared by a licensed and experienced business attorney, rather than a non-lawyer (can’t see potential pitfalls), accountants (bad move), or a one-size-fits-all internet site (simply, a terrible, unreliable place to get legal advice).

Here are some (my humble opinion) of the most important clauses often left out of LLC operating agreements:

  1. The Removal Clause
    At least twice in the last month, I have been asked to help get rid of unhelpful or obnoxious members. Better pray your Operating Agreement preparer prepared for this perilous process with appropriate precision.

  2. Restrictions on Transfer
    I consulted last week for members of an LLC who suffered from the Transfer Transaction. They loved working with the Husband. The wife…not so much so….

  3. Right of First Refusal
    Have this. Then also make sure everyone agrees on the method of determining the value of interest in the company. I suggest a disinterested third-party business appraiser. Call me for recommendations.

  4. Distributions and Allocations
    Learn what “phantom income” is, and how to avoid it!

  5. Capital Calls
    What happens when cashflow is low?

  6. Dispute Resolution and Dissolution
    Mediation? Arbitration? Binding Mediation? Where? Who? All important to know (because even the most loving of couples fight). How is a member allowed to leave, and how is their business interest value determined?

  7. Defining of Roles
    Who runs day-to-day? Who cares for the books? Repairs and Maintenance?

  8. Non-Compete Clause
    Remember, these will not be enforced if they are not narrowly drafted, unduly burdensome on one’s ability to earn living or against public policy.

How our Law Firm can help: Consulting a Business Law attorney is vital to help you understand what you need in your Operating Agreement and other formation documents. Give my office a call at (540) 721-6028 if you have questions about how we may assist you.

Disclaimer: The article above is not intended as legal advice. We recommend you come to our offices for a proper legal consultation with our excellent attorneys to formulate a strategy which is suitable for your specific case.

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