Operating Agreements in Limited Liability Corporations
As Fairfax, VA business lawyers, our firm has assisted in the creation of multitudes of limited liability corporations (LLCs) for our clients. Whenever our attorneys advise new clients about the legal aspects of limited liability corporations, the importance of a well-drafted and detailed operating agreement is always emphasized.
An operating agreement serves to define the financial and managerial rights and responsibilities of the LLCs members. An operating agreement establishes the roles that the members will play within the limited liability corporation, the procedure for removing a member, a line of succession for the various functions within the LLC, a procedure for adding new members, and contingency plans for the death, incapacitation or bankruptcy of a member.
Roles of the Members
It's important that the work assignments and positions of LLC members be defined in the operating agreement. For instance, if a member is designated as the operations manager, he or she will be expected to fulfill certain job functions. On the other hand, if a member is strictly an investor—one who is not expected to work within the LLC—it might be confusing and inefficient to have him or her show up and start handing out work assignments to employees. Without the operating agreement in place, there is always the chance that a members could shirk their duties or exceed their mandates.
Adding or Removing a Member
Oftentimes, the members of LLCs are also employees or managers. An employee may be brought into the membership to fulfill a promised incentive or as a hiring inducement. When this occurs, the shares of all members are impacted. For this reason, the operating agreement needs to include a provision for adding members. There should also be a procedure for the removal of members who are no longer seen as a proper fit for membership in the LLC.
Operating agreements should have a contingency plan for all foreseen and unforeseen events. These could include the death of a member, a member becoming incapacitate, a member declaring personal bankruptcy, divorce, et cetera. For instance, if a LLC member dies, does his or her estate retain ownership of his or her share, or does it revert to the surviving partners? If members are unable to perform their duties due to illness, incarceration, or other unforeseen circumstances, what becomes of their positions within the LLC? Business attorneys need to draft language in the operating agreement to address questions like these.
In summary, the operating agreement acts as a constitution for the limited liability corporation. If an operating agreement is flawed, partnerships can experience internal turmoil, civil litigation, disruptions in business, and even a shutdown. If you are considering becoming a member of a limited liability corporation in the Commonwealth of Virginia, it is in your best interest to retain the services of an experienced, reputable business law attorney with experience in business formation.
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