By Kimberly Shin, Esq.
I am a fan of DIY-ing–or at least the concept of it. I like knowing that if I really wanted to, I could build a house from scratch by watching YouTube videos. Or at least a chicken coop. I’ve watched more “How To” videos than I care to admit, but actually getting the courage and the will to follow the steps is a different matter entirely. Let’s talk about the cost as well. Have you ever noticed that the cost of buying the materials and tools needed to start your project comes out to more than what it would have cost to buy the chicken coop itself?
So what do DIY chicken coops have to do with free Operating Agreements? Well just like how I have zero carpentry skills and don’t know how to use a drill, a lot of business owners don’t understand legal jargon. Contracts stress them out and bore them to tears. I completely understand because that’s how I feel about construction.
The BIGGEST PROBLEM with DIY Operating Agreements is that the business owners DO NOT READ THEM. If they do read them, they may not understand all of the provisions. And unlike chicken coops, contracts are legally binding documents. Your business is bound to behave in the way that is laid out in your LLC Operating Agreement. What inspired me to write this blog article was a dissolution provision that I came across in a free Operating Agreement. It is critical that business owners using these free Operating Agreements read the documents carefully.
The dissolution provision stated that in the event of a “death, permanent incapacity, bankruptcy, retirement, resignation or expulsion of a member,” the LLC will dissolve “except that within [x] days of the happening of any of these events, all remaining members of the LLC may vote to continue the legal existence of the LLC, in which case the LLC shall not dissolve.” As a lay reader, you might think “what’s the problem?” As a business attorney, this provision is shocking.
A couple of different scenarios immediately come to mind:
- You might be a single-member LLC that has an online business as a side hustle that generates income through advertisements. After several years of hard work, you were able to hire freelance writers to create the content for you, and now the business can run on its own with little to no help from you. The business generates monthly income that you sock away for your children’s college education. An unfortunate accident happens to you, and now the passive income-generating LLC is forced to dissolve. Your spouse might not be able to save the business, and if you don’t have a spouse you might completely lose all of those years of hard work. The business is gone because there is no remaining member, and the Operating Agreement states that the LLC must dissolve.
- You have a multi-member LLC that you started with two friends. You each have a one-third ownership of the business because you each contributed $10,000 to start the business. Within the first month, you begin to have conflicts with one another. You quickly realize that you and your friends have very different approaches to managing money and clients. After consulting with close friends and family, you realize that you will lose all of your investment at this rate; you don’t think the business will ever succeed. You want to get out of the business and take your unspent capital contributions with you. The other two members disagree. They want to keep going, and they need your capital to keep the business afloat. The other two members speak with an attorney who says that under the dissolution provision, which is the only way that you would be able to get your money back since the other two members are unwilling to vote to return your capital to you, you have no right to dissolve the LLC. You are free to resign, but you can’t take your money with you. Your money is gone.
If you ever use a free template or a generic contract template, please be sure to READ and UNDERSTAND them before signing them. You also have to make sure that the contracts you use are drafted to be compliant with the laws of the state in which you do business. If you need help and if you decided that DIY might not be the best approach for you, contact a small business lawyer licensed to practice in your jurisdiction.
Kimberly Shin, Esq. is an attorney at Law at Kimberly Shin Law Firm PLLC. She is passionate about educating her clients on how to operate their businesses so that they are legally compliant. You can reach her by email at firstname.lastname@example.org. Follow her on Twitter/Instagram @legallyprotect or visit her website at https://legallyprotect.com.
DISCLAIMER: This article is provided for educational and informational purposes only. An attorney-client relationship is not formed by commenting on this post, visiting her website, or following her on social media. The information provided here is not intended to, and should not replace, advice from a licensed attorney in your state. Kimberly Shin Law Firm PLLC disclaims all liability with regard to any and all actions taken or not taken as a result of information contained here.