The LLC Operating Agreement: When to Consult an Attorney
Whether you already have an LLC or you want to form one, the LLC Operating Agreement is an important and necessary document in your LLC formation. With the rise of online DIY legal documents, when should you attempt it yourself and when should you consult an attorney? In other words, when it is a valuable investment to consult an attorney to draft your LLC Operating Agreement.
First, What is an LLC Operating Agreement?
An LLC Operating Agreement is a document that describes the operation, management, and the tax elections of the LLC. In a single member LLC, you are simply putting on paper your agreement with yourself. It may seem silly, but can be important if you are ever involved in litigation. In a multi-member LLC, the document is a contract between all parties regarding the operation of the LLC. Here, you agree upon the rights of the owners (called “members”), how much voting power each owner has, and what happens if an owner wants to leave the LLC, becomes disabled, or dies.
Single-member LLC Operating Agreement
Here, the LLC Operating Agreement is truly more a formality than a necessity. That is not to say that the Operating Agreement is unimportant, but it’s value is more to establish the LLC as an entity separate from the owner rather than to guide the owner how to run the business. Online services that provide documents specific to your state will probably suffice. Having personally reviewed the Pennsylvania templates provided by NoLo and Legal Zoom, these templates are perfectly adequate for most single member LLC.
The disadvantage of DIY documents is you the lack the valuable legal counsel regarding other important business formation matters you many not have considered, such as intellectual property, employee matters, local zoning and permitting matters, tax compliance, and legal compliance.
Multi-member LLC Operating Agreement
I highly advise consulting an attorney when forming a multi-member LLC. When two or more people/entities form a business, the LLC Operating Agreement is no longer a formality but now addresses voting rights, membership rights, decision-making authority, tax accounting, non-compete provisions, and (most importantly) how the owners will be paid.
An attorney will not only explain the ramifications of these provisions, but will also guide the conversation between the parties to reveal potential conflicts, such as:
- what if one owner wants to sell his/her interest in the LLC,
- what if a owner dies or becomes disabled,
- what if one owner actively works the business and the other is a passive investor,
- should voting rights be equal to ownership percentage,
- what if we cannot agree (especially important if each owner has 50% voting rights)
- what if the LLC needs capital and one owner cannot/will not contribute.
The attorney will advise how to resolve these and other conflicts. A DIY template will not only fail to raise most of these issues, but will not provide the counsel necessary to solve the issues.
Whether a single member LLC or a multi-member LLC, a competent attorney will provide a customized document that meets your specific business goals and complies with your industry’s regulations. For low risk matters, such as a single member LLC, DIY products will usually suffice. For higher risk matters, such as a multi-member LLC, an attorney provides invaluable counsel.