In order to run an efficient and successful LLC, it is imperative that a well-planned Operating Agreement be created. For example, an Operating Agreement sets up who runs the day-to-day business, and creates a system for resolution of internal disputes between members. I tried to have my two-year-old daughter sign an Operating Agreement to help us resolve conflicts but she’d rather just throw her bowl of milk and Cheerios on the ground._
By creating voting standards and/or a buyout option, an LLC can avoid judicial dissolution of the company when these disputes occur between members. Imagine having a company that creates a successful product, let’s say a t-shirt company, then suddenly one of the members only wants to make t-shirts without sleeves. An Operating Agreement would allow the members of the company to handle this dispute while keeping their company, and sleeves, intact. The other member could be bought out, and then take the money to Mississippi to start a very successful no sleeve t-shirt company, all without having to throw their bowl of Cheerios on the ground.
A well-designed Operating Agreement can also handle the unfortunate situation of the death of a member. Let’s say a member of a company that makes trampolines and industrial ceiling fans dies suddenly for obvious reasons. This member’s family can be taken care of for all of that member’s hard work without having these same family members interfere with the business operations.
Finally an Operating Agreement protects a business’s intellectual property. This includes trademarks, copyrights, and trade secrets. If a company is formed without an Operating Agreement, a member can try to claim the intellectual property as an individual asset, instead of an asset of the business. For example, if John Mayer’s band broke up without having an Operating Agreement in place, someone else in the band could claim that their body was a wonderland. If you didn’t get this joke, it was very funny.
In other words, creating an effective Operating Agreement is really important for a new business. That is why I let Elliott Stapleton help me create mine. Now I just have to find investors to buy into my no sleeve t-shirt company idea.
You may also enjoy reading Part 1 and Part 2 of the Starting a Business series.
When I finally made the big decision to start my own LLC, I celebrated by popping a bottle of champagne. This is when my lawyer Elliott Stapleton told me there were more steps involved in creating an LLC than just making the decision to start one. I told him that I was ready to complete these steps, but he thought it would be better if we waited until the bottle of champagne I just drank wore off.
The next afternoon we began the important process of setting up a separate legal entity in order to secure the limitation of liability of my personal assets from the liabilities of the business. When I hear the word ‘entity’ I think of aliens coming in their spaceship to abduct me, but that’s probably because I watch too much Sci-Fi channel and then can’t sleep. Elliott explained that the entity he was referring to was a necessary legal entity for the business and that I could come out from hiding underneath the desk.
To create this entity we first registered the Articles of Organization with the Ohio Secretary of State. Then we made the necessary tax filings, and obtained the proper federal, state, and local authorizations. And by ‘we’ I really mean Elliott did all of these things while I played with the various colored paper clips and rubber bands on his desk.
Elliott informed me that failing to follow the proper protocols after registration with the state would result in the loss of a company’s limited liability status, and that there was a common misconception that filing with the state alone limits personal liability. I could tell Elliott really loved his work because the stuff he spoke passionately about was really boring to me.
When Elliott had completed this process, he assured me that now my personal assets as owner were separate from the company, and that the limitation of liability was in full effect. I thanked him and assured him that I would buy him more paper clips if I could keep the paper clip spaceship that I had created with the rubber band ‘entities’ inside.
Later when my wife asked me how the business was coming along, I told her about the entities in my paper clip spaceship, and I could tell that she was also relieved that I had Elliott’s legal guidance through this process.
For more information on starting your business, read Starting a Business: Part 1.
For the next step in starting your own business, read Starting a Business: Part 3.
Elliott Stapleton Attorney with CMRS Law