San Diego Business Attorneys Serving LLCs and Their Members
What is an LLC Operating Agreement and why is it so important to focus intently on this corporate document during startup and throughout the life of your company? How can an experienced corporate lawyer from the Watkins Firm play an important role during business formation and throughout the life of your company?
Many small business owners simply want to get into business and get to work. If there is going to be more than one owner or “member” in your LLC it is vital to pay attention to the operating agreement contained within your corporate documents.
Your LLC’s operating agreement is basically an outline of the rules and regulations which will guide your company’s day-to-day operations as well as all financial and process or function-related decisions. The operating agreement is binding contract which establishes duties and responsibilities its members.
The LLC Operating Agreement establishes the roles and responsibilities of the LLC’s co-owners or “members”. It provides for the financial responsibility of each member, what job(s) they will be responsible for, the percentage of ownership in the company they will enjoy and how profits and losses will be distributed.
The LLC operating agreement as a corporate contract should also provide a mechanism to handle major life events for its members such as bankruptcy, divorce, incapacitation or death.
The operating agreement should establish when corporate meetings will be held, how voting will occur, and the voting powers and rights of each member. The operating agreement further protects your business itself, and provides additional legal protections to separate the personal holdings of the members from the operations and assets of the business. It is another component of the “corporate veil”, the very essence of why you chose an LLC to begin with.
Why is the LLC Operating Agreement Such a Critical Document?
California’s legislature recently passed laws that default to protect the minority interest in business operations and disputes unless the corporate documents address those issues specifically. Other states have provisions or “default rules” that require LLC businesses to divide profits equally among members regardless of how much each invested in the business, or the nature of their active role in running the company.
Our business clients want to be able to establish their own rules and guidelines for how their business is to be run, instead of having to be bound by the default rules established in California or some other state.
The operating agreement should also clearly establish when and how money can be taken out of the business and by whom. Is income to be disbursed in a regular cycle (such as payroll) or can members draw distributions as needed?
If the income is going to be left in the business the members will still owe taxes on their allocated share. Will the LLC provide enough income to cover the taxes owed on each member’s allocated portion?
Most importantly, the operating agreement is a crucial component of the corporate veil. It actually establishes the roots of the protections of the corporate veil while protecting it’s owner-members. This is why it is important to work with your business attorney from the Watkins Firm. We have more than 40 years of experience and have formed literally thousands of LLCs and corporate entities. We provide sound counsel and guide you through each step of the process.
Listen to one of our Recent Sound Business Insights Podcasts:
“Episode 2 – Starting a Business”
The Protections of the Corporate Veil
The LLC operating agreement is an important component in the protection of the corporate veil. The corporate veil is the reason you have a corporate business entity in the first place. The law views an LLC as if it is a separate person from the members who own it. This allows the members to separate and protect their personal assets from the debts and potential liabilities of the business.
Your operating agreement should provide protections from personal liability to the LLC. You want to protect all of the hard work, time, money, energy and effort you are about to invest in this company. You also want to separate and protect your personal assets and financial accounts from the debts and liabilities of the business.
Our Experienced LLC and Business Attorneys are Valuable Advisors
A downloaded form won’t take you through the various options and clauses that protect you most, or that override California laws or the laws of another state. At the Watkins Firm, our attorneys have extensive business experience not just in business, but in businesses like yours. Our clients value the comprehensive advice and guidance we bring not just to individual components like the formation of an LLC or an operating agreement, but to the planning, operations and challenges their businesses require to achieve their goals.
Every San Diego and Southern California business should have an experienced business attorney, a proven CPA or tax expert and a banker or financial backer. As your business attorney, the Watkins Firm is like a business coach. We’ve been in business for more than 40 years ourselves. We have served thousands and thousands of companies and encountered almost every challenge or opportunity a company can face. We know where the mines are hidden (both the explosive type and the gold type!). We will help you to avoid the pitfalls that cause more than 4 out of 5 companies to fail before the 5th birthday of their business. We don’t want you to simply survive, we want to help your company to thrive.
There are almost 100 separate important choices to be made concerning all facets of how the company is to be structured and protected. The Watkins Firm guides our clients through every step of the corporate formation process. We have a substantial proprietary library of proven, successful corporate documents and contracts which are battle tested. We don’t create LLC operating agreements from scratch. We tailor an existing, proven operating agreement to meet your unique issues, objectives and needs in a cost-efficient and timely manner.
It’s never too late to create or update your LLC’s operating agreement. We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today. We will work together to protect the time, money and hard work you are putting into your business, and to ensure that your business thrives.