Law of the Market: Why Your LLC Needs an Operating Agreement

It’s probably safe to guess that of the approximately 75,000 multi-member LLCs in New Hampshire, only a small fraction have written operating agreements, let alone competently drafted agreements. For one, the legal fees for planning and drafting good operating agreements can be costly.

Additionally, when the committee of seven New Hampshire attorneys, which I chaired, drafted the current version of the New Hampshire LLC Act, we did our best to comprehensively address the default provisions of the law – that is, the provisions that would be binding on the members of the LLC unless the members waive them in a written operating agreement – ​​all legal issues that are likely to be important to most LLCs. In other words, we drafted the New Hampshire LLC Act to serve as a “ready-made” operating agreement as much as possible that would make written operating agreements unnecessary.

In my opinion, however, any good written operating agreement should address the seven main issues listed below. But if you consider these issues for even a minute, you will realize that no LLC deed, no matter how well drafted, can adequately address these issues.

To illustrate:

Legal Issues LLC. A good operating agreement should identify all potentially relevant legal issues for the members and managers of the affected LLC, and it should resolve those issues in a way that is convenient for all members. But, due to the needs of its members or for other reasons, every LLC has at least some unique legal issues that no LLC law can solve.

Default provisioning issues. The New Hampshire LLC Act contains approximately 100 default provisions. At least some of these provisions are likely to conflict with the needs and interests of one or more members of most LLCs. A good operating agreement should prevail over each of these provisions.

Tax Problems LLC. A good operating agreement should identify all potentially relevant federal and state tax issues for LLC members and managers, and it should address those issues, as well as any relevant legal issues, in a manner that is acceptable to all. the members. But these issues vary widely from LLC to LLC. Thus, the New Hampshire LLC Act cannot and does not address any of them.

Dispute resolution issues. A good operating agreement should have provisions for resolving disputes that arise between members of the relevant LLC or between members and the manager. Under the New Hampshire LLC Act, the default method of dispute resolution is litigation. But because of its confidentiality and for other reasons, arbitration will often be a much better method of dispute resolution for an LLC than litigation.

Veil piercing problems. By demonstrating the legal separation, on the one hand, of the relevant LLC itself and, on the other hand, of its members, a good LLC should protect members against veil-piercing claims against the LLC and its members by third. (As readers may know, piercing the veil is a legal doctrine that allows judges to hold owners of a business entity personally liable for claims against the entity if the owners have used the entity to commit fraud or serious injustice. But no business law can be expected to address even one of the eight core guidelines, let alone all eight, that business owners must follow in order to protect themselves against veil piercing.

Third Party Issues. A good operating agreement should identify and answer all questions about the legal and tax structure of the relevant LLC that may concern third parties such as the IRS and potential lenders and investors. These include, for example, questions about which specific members have the right to sign LLC contracts and whether the LLC has enough cash and other financial resources to meet piercing “adequate capitalization” standards. No LLC law can solve these problems.

Practice manual problems. Due to the fact that it is written as far as possible in plain English rather than legal or tax jargon, proper functioning should provide members and managers with a working understanding of their respective legal and tax rights and duties and how to deal with these problems on a day-to-day basis. -today. But no matter how well drafted, no LLC deed can serve as a practice manual for LLC members, and each such deed must contain at least a few provisions that can only be adequately expressed in legalese.

If they can afford it, people who form LLCs should hire competent attorneys to plan and draft operating agreements for them that address the above seven questions. The same goes for people who already have LLCs but don’t have operating agreements or whose operating agreements don’t address any of these issues.

John Cunningham is an attorney licensed to practice law in New Hampshire and Massachusetts. He is legal counsel for the law firm McLane Middleton, PA. Contact him at 856-7172 or [email protected] His website is llc199a.com. To access all of his Law in the Marketplace columns, visit concordmonitor.com.

Law in the Marketplace is a legal advice section. It airs weekly in the Sunday Business section. The author is a lawyer at Concord and is not a staff member of the Monitor.