Prevent Litigation Between Members in Your LLC

Prevent Litigation Between Members in Your LLC - Operating

Why do you need strategies to prevent litigation between members in your LLC?  Are there steps you can take, up front, that can reduce the likelihood of a dispute down the road?

The first step to prevent litigation between members of an LLC in San Diego is sound planning in the corporate documents and the operating agreement.  These documents should be created when the team is fresh and everyone has a cooperative spirit looking out for what is best for the company.  We help our clients to anticipate almost all of the potential interruptions and conflicts that might arise, and establish specific formulas (in advance) for how those conflicts will be resolved.

If the corporate documents and operating agreement were downloaded or generic, we work with our clients to bring them into compliance with California law, to ensure maximum protection for the personal assets of all member owners.  When a dispute arises, we work to re-establish common ground and facilitate a negotiated resolution in an expedient and affordable manner.  When necessary, additional steps such as mediation and arbitration may help to prevent a court battle.  This is almost always in each party’s interest.

The LLC operating agreement is a crucial corporate document.  Unfortunately, many small business owners simply ignore this altogether in their rush to get the company up and running.  However, the operating agreement establishes how the company is to be run as well as how the relationships between its owners will work.  It should also govern the distribution of profits and other important aspects of corporate operations.

The goal to prevent litigation between members in your LLC provides many genuine business benefits:

1.  It reduces distraction and wasted effort(s), while focusing each member upon their responsibilities and the primary objectives of the business

2.  It preserves the strength of the underlying business and the relationships between the members

3.  It saves time and significant expense

The experienced business attorneys at the Watkins Firm have over 40+ years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.  Owning and managing a business is quite difficult and the strain on relationships can be intense.  Proper planning and sound business guidance and counsel can help to avert disputes in the first place, and minimize the impact of disagreements that do occur.

Dan Watkins Founding Partner of the Watkins FirmPro Tip: “Limited liability companies came along in the nineties, and California was one of the first states to have it. It’s like a corporation or it’s like a partnership and you get to elect which way you want to be. It’s very versatile and it comes with what we call an operating agreement. You don’t have to have it, but it’s a great document that acts sort of like a shareholder agreement.

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 invest, or if all invested the same, can get more money for their work.

Mostly it’s going to be a closely held company. You have several options and you get more flexibility and you can bring in partners and you can remove partners and things like that.  If you want to prevent litigation between members in your LLC make sure to pay attention to the operating agreement.” – Dan Watkins, Founding Partner 

If you interested in strategies to prevent litigation between members of an LLC in San Diego 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.