Business Lawyers Blog
An operating agreement serves as the foundational document for a limited liability company (LLC). It functions as the equivalent of a partnership agreement. A well-crafted operating agreement should proactively address potential member disputes by clearly delineating each owner’s rights and responsibilities. It should anticipate common disputes, such as the circumstances surrounding the sale of an ownership share, retirement, or death of a member.
Structure Law Group, LLP, can draft operating agreements for your business. Speak with a Silicon Valley LLC business lawyer in a private consultation. The sooner you draft this critical document, the more protection you receive.
Operating Agreements in CA LLCs: Preventing Member Disputes
An operating agreement should include basic information regarding capital contributions and ownership percentages. But remember to include the following clauses to prevent some of the most common disputes.
- Management Structure
Most LLCs are either member-managed (managed by owners) or manager-managed (managed by hired employees). When identifying your structure, you can outline managers’ authority and the procedures for hiring or firing them.
- Voting Rights
An LLC needs to make countless decisions. Some of these decisions are small and should be made by the managers or members alone in the ordinary course of business. Other decisions are more significant and require a vote of all members.
Include a clause that describes how decisions are made. Identify which decisions require a vote of the members and specify whether the vote requires a majority, a supermajority, or even a unanimous vote. For example, admitting new members or taking on debt could require supermajority support.
- Distribution Policy
Disputes often arise when members want to take profits out of the company. The risk is that one or more members will treat the LLC like a piggybank, so draft a clear distribution policy. This clause should specify when distributions will occur (if ever) and whether managers have discretion to make distributions.
- Transfer Restrictions and Buy-Sell Agreements
Many disagreements arise when a member wants to leave the LLC. They might want to sell their ownership stake. Remaining members don’t want to be saddled with a new owner, especially if they have no say in who that owner is.
We usually include transfer restrictions that specify whether a member can sell their ownership interest and whether approval is required. You might also include a right-of-first-refusal.
Buy-sell provisions are also important. They can address what happens to the member’s interest upon death, retirement, disability, bankruptcy, or voluntary withdrawal. This clause should specify how to value the member’s interest in the event of a buyout.
Dispute Resolution Policies
Sometimes the members are deadlocked. You might include a provision that requires mediation to help resolve disagreements. Other options include arbitration, which is private and usually less expensive than litigation.
Some agreements provide that when the members are deadlocked, one or more members have the right to sell their interest. We can discuss how to draft this type of provision in an LLC operating agreement.
Consult an Experienced LLC Attorney Today
A carefully drafted operating agreement can reduce uncertainty, clarify member expectations, and provide a framework for resolving issues before they disrupt business operations. For Silicon Valley LLCs, these provisions are especially important as ownership structures evolve, capital contributions change, or new members join.
Structure Law Group, LLP Silicon Valley attorneys advise founders, investors, and LLC members on drafting operating agreements that address governance, transfers, distributions, and dispute resolution in a manner aligned with the company’s business objectives. To review or prepare an operating agreement for your LLC, contact a Silicon Valley business attorney at Structure Law Group, LLP at 408-441-7500.