You should regularly update your LLC’s operating agreement to prevent disputes and protect the viability of the corporate veil. What happens if you want to bring a new investor into your LLC? Why is it important to review and update your LLC’s operating agreement?
The operating agreement is a critical document for any LLC. It establishes the relationship between the owner “members” of the LLC, and how profits are to be distributed. It also specifies voting rights, issues of control and valuation of each business interest. When you bring a new investor into your company you should be concerned with protecting your own management interests, while providing adequate controls and an attractive return on their investment.
When you work to regularly update your LLC’s operating agreement, you increase the value of your company while protecting against costly disputes. Are you planning to bring in another member or investor? What participation will the new investor(s) have in the day-to-day operations of the business? What percentage of the company are they requesting, and how should that be negotiated? How should you provide the adequate oversight and returns that an investor will seek without surrendering potential control of your LLC? The experienced business attorneys at the Watkins Firm have more than four decades of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California. The owners of California LLCs know we have the experience to explain the process of attracting new investment to your business, as well as the risks and rewards of bringing a new member into your LLC.
The key to the success of any California LLC is the operating agreement. This is the contract that should control ownership of your LLC and preserve voting rights and profit distribution. Our experienced legal team will advise you throughout negotiations with any new member or investor. We represent and protect your interests while maintaining a positive atmosphere surrounding the deal. We understand the precarious balance of your interests in locking in the investment without surrendering too much control of your LLC.
Pro-Tip: “The whole reason to have an entity is to separate you the person from the legal entity of the business. This is especially true if you’re going to be doing some big business, you’re going to have big liability or you could personally not have big liability. And also you can have an entity that can be sold. You can have an entity that can be sold in whole or bring in investors. If you do everything right, you get to do all these things. If you get a big opportunity and you didn’t set your company up correctly, then you can’t have your friend with an extra million dollars invest in your business. We’ve seen cases where they let the LLC operating agreement go and got sloppy, and then they’ve got to rewrite everything and restructure everything and hope they didn’t make any mistakes. And all of a sudden that opportunity doesn’t look so like a good deal. And that person who’s got the investment money will say, well, this company isn’t serious, they’re not professional. And you’ll miss it all or become involved in an expensive dispute because you didn’t pay attention to keeping your operating agreement up to date.
Pro-Tip: “The whole reason to have an entity is to separate you the person from the legal entity of the business. This is especially true if you’re going to be doing some big business, you’re going to have big liability or you could personally not have big liability. And also you can have an entity that can be sold. You can have an entity that can be sold in whole or bring in investors. If you do everything right, you get to do all these things. If you get a big opportunity and you didn’t set your company up correctly, then you can’t have your friend with an extra million dollars invest in your business. We’ve seen cases where they let the LLC operating agreement go and got sloppy, and then they’ve got to rewrite everything and restructure everything and hope they didn’t make any mistakes. And all of a sudden that opportunity doesn’t look so like a good deal. And that person who’s got the investment money will say, well, this company isn’t serious, they’re not professional. And you’ll miss it all or become involved in an expensive dispute because you didn’t pay attention to keeping your operating agreement up to date.An LLC is often like a partnership and you get to elect which way you want to be. So five buddies want to get together and buy a bar. They can have an agreement that they all sign that has a lot of, what if this happens, what if that happens and who gets what money? Because sometimes you have sweat equity, you got one guy working the bar all the time and the other guy’s just drinking. So you can have it written in into your operating agreement that the guy who works harder, even though they didn’t maybe invest the same amount up front, can get more money.
So the type of people who would select an LLC as an entity, mostly it’s going to be a closely held company. For the most part.” – Dan Watkins, Founding Partner
If you are serious about growing and building the value of your company or bringing new investment into your LLC or require assistance to update your LLC’s operating agreement we invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
