Is Your Operating Agreement Complete?

bombYou and your partners are successfully running your business. After talking to your accountants and lawyers – I am always hopeful – you decided to operate your business as a limited liability company and entered into an LLC operating agreement.

This operating agreement governs your relative rights and obligations.

I’m fairly certain that your operating agreement addresses capital contributions, distribution of cash flow, voting rights and management. And it probably also addresses transfers of membership interest, the admission of new members and the exiting of existing members.

However, the agreement may be sorely lacking in other areas. Does it, for example, address:

  • what happens if a member dies, or becomes disabled
  • how membership interest is valued at various trigger events
  • the fiduciary duties of the managing members
  • how a managing member may be removed and replaced
  • the limitations or rights of a managing member to engage in outside business activities
  • the obligation, if any, of a member to turn over business opportunities to the LLC

But let’s talk about one issue now: divorce.

Divorce can take its toll personally. But it can also affect your business.

bombA divorce decree or order may transfer some or all of the LLC membership interest of a member to his or her ex-spouse. The other members may find themselves in the peculiar situation of being in business with a new member, the divorced spouse of their old member. And that situation can be particularly difficult if the old member had a significant management role in the business. The bottom line: make sure your operating agreement addresses this issue.

Please let me know if you have any questions.

And contact me if you’d like me to do a legal review of your current LLC operating agreement.

— Alan N. Walter