Just as the you would not allow a warm weather loving beach comber to devise your winter hiking trip, you would not allow an online service to prepare an operating agreement for your LLC. This is because a properly drafted LLC operating agreement provides answers to disputes and clears up confusion before these issues occur. A properly drafted LLC is a roadmap which helps each member of the LLC understand his or her place in the corporate structure.
Now, back to the title of this article…imagine yourself deciding to go for a week-long hike in the White Mountains of New Hampshire during mid-winter. Now image that you decide to take this hike with a friend, but neither of you takes the time to figure out who will bring the compass, the food, the water, the tents, etc. What do you think will happen on this hike after the first five miles when you stop to take a break? Chances are, something will be missing – like water or food or shelter. And obviously you do not want to find out that key items necessary for your survival are lacking while in the middle of trying to survive.
The Operating Agreement for Your Massachusetts LLC
Similarly, an operating agreement is the ‘putting into words’ of what each member of the LLC must bring to the table. The operating agreement lets each member of the LLC know what their rights and duties are, hopefully, to avoid any confusion at a later date. Taking the time ahead of time to spell out these matters is not only wise, but will likely save you and your company money in the long run.
These are some key aspects of an operating agreement that you should consider:
- Does everyone in the LLC have equal membership power?
For example, perhaps one member has contributed much more than the others at the beginning of the forming of the LLC. Each member might agree to allow that member to have a superior voting interest on certain issues, or take a bigger profit than other members. - Who has contributed what to the LLC?
Perhaps one member has nothing but money, while the other has nothing but time. Shouldn’t the time given by one member have some value? Likewise, shouldn’t the money contributed by the other have value to that member? The operating agreement can be structured to reflect the value of each of these contributions so that members receive an interest in the LLC that is proportional to what they have contributed at the outset. - How is the LLC managed?
If the LLC is managed by a manager, someone appointed by the members most likely, questions are raised such as:
What are the manager’s responsibilities?
Can all members appoint managers?
Can members terminate a manger, do these members need unanimous agreement?
How often must the manager conduct meetings?
How long does the manager fulfill that role? - What about voting rights of members?
Do members have voting rights that are directly proportional to their ownership interest; or
Do members have some other voting rights as decided in the operating agreement? - How are the records of the LLC kept and who has access to them?
- What happens to ownership interests of existing members when a new member joins the LLC, are the existing members interests diluted, or is there some other arrangement?
- Can a member of the LLC transfer its ownership interests by assigning these interests to a third party without approval or with approval of the other members?
- Which member or members make the determination that the LLC must dissolve?
- Other provisions as they may arise…
A Note about Online Operating Agreements
“But hold on a moment,” you may think to yourself, “can’t I simply go online and print out an operating agreement tailored to the laws on LLCs in Massachusetts? The answer is yes you can, but no you shouldn’t.
While online operating agreements exist in the hundreds, and many can be pulled directly from a website for free, these agreements do not satisfy the detail and experience test that I alluded to at the beginning of this article. I would not trust my life, or anyone else’s life for that matter, to someone completely unfamiliar with the circumstances that I am likely to face on a winter hiking trip in the White Mountains. Similarly, I would not trust my business to computer software that knows nothing about operating my business (except for what I tell it – and remember, the saying with software is “garbage in, garbage out”) and that can only ask me questions based on what the algorithm can anticipate is a typical scenario. Unfortunately for software, in business – just like in winter hiking – there can be many unexpected occurrences which need to be thoroughly examined prior to them becoming a problem.
For more information see the following articles:
“Forming an LLC…”
“LLC for Your New Business?“
“Incorporating a Business in Massachusetts...”
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The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.
