Multiple-Member LLCs: Avoid a Conflict, Use a Lawyer at the Outset

By January 16, 2017Corporate

Many people underestimate the number and complexity of the issues that arise in the management and operation of a multiple-member limited liability company.   Many people forming a limited liability company either do not use a written Operating Agreement or use a simple form with blanks to fill in.  While it may be easy and cheaper to put off entering into a comprehensive Operating Agreement until the company has taken off, members often find that it is then too late.

Members are never more likely to agree (and to be rational) on complex issues than at the outset before an issue vests to the point that its resolution may directly affect the members.  Once the members have in their mind that the company is to be run a certain a way, it is difficult to dissuade them into running the company a different way.  What ends up is the members find that they are too far gone to agree upon an Operating Agreement.  So, they continue to run the company without an effective Operating Agreement until a conflict arises to the point that it undercuts productivity and threatens the viability of the company.   Therefore, it is extremely important to have as many issues as possible negotiated and set forth in a written Operating Agreement before the company starts operating.

Below is a list of questions that a lawyer will ask the members to assist in drafting the Operating Agreement.  This will give you an idea of the types of issues that the members should discuss and resolve before the company starts operations.

    1. How will the company be managed? By its members or by designated managers?  How many members or managers must agree for the company to make a decision?  Can each member or manager enter into an agreement on behalf of the company without consulting the other members or managers?  Are there any major decisions (dissolving the company, adding new members, taking on significant debt, etc.) that will require all members or managers, or a super-majority, to agree?
    2. What happens if the company needs additional capital beyond the initial contributions of the members? If the members must put in additional capital, what if one or more members cannot or do not?
    3. Who will decide when distributions will be made and the amount of the distributions? Will there be mandatory distributions to pay members’ taxes on their interests in the company?
    4. Can members enter into competitive businesses? What if they leave the company?
    5. What protections (or lack thereof) should a minority member have? In what instances can the minority member be diluted without his/her consent?
    6. Are there instances where one member should have the ability to buy out another member? For what price?  If the company is owned by 2 members 50/50, what happens when the members cannot agree?
    7. Can a member sell his/her interest to a third party?
    8. What happens upon the death or incapacity of one of the members? Should the company or the other members be able to purchase that deceased or incapacitated member’s interest or should it pass intestate?

Because of the multitude of issues, I would strongly suggest using a lawyer to walk you through each of these questions, and the different options on how to answer them, so you can determine what works best for you and your company.

Disclaimer:  Gentry Law Group, LLC made this blog available to give us an outlet to describe our thoughts and analysis that we think might be useful to the public.  By no means is it meant to be, nor should it be used as, legal advice. This blog does not establish any attorney client relationship between you and Gentry Law Group, LLC. This blog is not a substitute for legal advice from a licensed attorney.  But, we do hope you found it interesting and helpful!