LLC Operating Agreement

[Jeff V.]

Starting an LLC and at the point where my business partner and I have come to agreements on how the business will be ran ect.

We will be putting these agreements into the LLC Operating Agreement. My question is once this document is drafted does it just need to remain on file or does it also need to be submitted to the secretary of state along with the Initial Report and Articles of Organization.

I'm located in Louisiana and will be Organizing a Louisiana LLC. Louisiana does not require Operating agreements for the LLC, but I have a partner and believe it to be the best solution to protect both my partner and myself.

Please advise on whether this has to be filed with the state, or recorded somewhere in public record or just to have on hand for opening accounts ect in the business name.

Thanks,

Jeff V.

[Bill Gulley]

@Gregory Tigan

Ownership of any business entity is personal property. Generally after marriage any personal property held by either spouse is property the other spouse has an interest in, so yes, a spouse can make claims to property acquired during the marriage such as with a divorce. Property acquired prior to the marriage is generally separate property so long as that property or the benefits from it are no commingled with the other spouse. 

On-Line Lawyer is not a good way to  put an organization together, as Al mention, see your attorney. 

Lawyers are trained to think in abstract terms and deal with issues referred to as "life events" and "unknown unknowns". They cover the "what ifs" before they occur in a good agreement. Accountants, such as a CPA also deal with these aspects and are aware of operational issues that arise from unknown life events. Addressing such issues through the school of hard knocks will teach you about such matters but it can be very expensive not to mention your company can unravel, fall apart and be lost. 

Life events include, but not limited to, death, incapacitation, injury, incarceration, divorce, bankruptcy, suits and claims from inside the corporate structure or outside of it. These are unknown unknowns of what might happen, to you or others. These unknowns must have a contingency plan to ensure that the entity survives such occurrences or is dismantled with assets distributed as desired. 

State law addresses many of these aspects, most often operating "by-law" will not meet the intentions of members or partners and in the event that an event is not clearly stated to the contrary the law becomes operative. In some cases, the state law will be acceptable and in some cases, such as "winding up business" where you terminate operations, the law must be followed as there are statutory requirements.

When you fail to address "binding authority" it may be that any member or officer of a company has authority to execute a contract. Now, in real estate a closing attorney or company will want to see who has been granted authority to execute deeds and real estate agreements, but the lumber company might not ask. 

Signature authority simply tells us who can sign the checks or act on behalf of the company. Drafts or checks should be limited to some extent, this keeps a bad partner from cleaning out an account and allowing other members to weigh in on major purchases. This is call a "cut off" amount and may be set at say $500.00. Joe can sign checks up to $500.00 and any draft above that then requires both Joe and Bob to sign the check. A cut off amount protects both partners, if there is evidence that Bob signed the check he can't make certain claims against Joe and Joe can show he was not acting at the detriment of Bob. 

This also goes to purchase authority as it can require Bob and Joe to agree on major purchases. Specific authorizations can be made under a cut off, for example, Joe can buy lumber and building supplies up to $10,000.00 but be limited to any other check to  $500.00. 

Profits are usually split equally by law, at times regardless of the interest held in a company, when profit distributions are not specified. The profits can be dependent on the contribution to capital as well, so if you have a money partner you could be out in the cold from your contribution of labor or expertise. This certainly comes into play under bankruptcy laws and liquidations. 

Devising an operating agreement is rather touchy, in defining activities of partners there needs to be clear areas or responsibility specifically, yet you don't want to be so specific that carrying out some duty is restricted or hindered. Within areas of responsibility you can state to do all things usual and customary in the hiring of labor and services related to properties renovated. Does that include signing a listing agreement with a Realtor or should both Bob and Joe be involved in listings?

Using the term "manage" along with usual and customary can be dangerous language as one may be able to do anything related to management, like increasing payroll, advertising, banking arrangements or other matters that when viewed collectively exceed a cut off, meaning Joe can only write a check for $500.00, but how many checks, to who, why?

A "buy out agreement" should be in place in your operating agreement. This states how the assets are to be valued and the rights of either party to exercise the right to buy out the other partner under certain events.   Such rights become operative if those life events mentioned come to pass, at death or divorce I don't want Mary being my new partner since she knows nothing about what Bob does. Added to this is a failure to act, it's not uncommon for one partner to drop the ball, become disengaged and sit back doing nothing but demanding their share of profits. If a disagreement arises then a buy sell agreement  can be very handy!

I can't really agree with getting some sanitized version of an operating agreement and filling in the blanks. For one thing using the work of another attorney without consent or consideration can get you zapped! If your operating agreement is invalid your company is sunk! Forget any liability protection if you copied an agreement. I can usually spot an agreement that was a fill in the blanks and changed, I can spot one that has been written by an attorney and by some real estate agent playing attorney or any other amateur.......I'm pretty sure a judge can too. Then the judge asks you...."where did you get this agreement?"

Lawyers and judges shake their heads when they see DIY contracts, while it's perfectly legal to draft a contract you are a party to, there will be a lack of confidence in that contract as opposed to it being recognized as a document drafter by an attorney. That also means a judge will be reading the contract with much more scrutiny and looking for contradictions to law as well as basic legal requirements. 

The best way to get your agreements is to draft them then give it to your attorney and ask that they review the document as to its form and content. Most likely they will charge much less and make corrections, than if they have to start with a boiler plate contract and devise terms. Good luck :)