Multi-Member LLC

Operating Agreement Issues

Things to consider when forming a multi-member LLC:

What has each partner invested in the company? 

Be clear on who has contributed what to the business. One partner may invest money while the other invests time and skill

What are the responsibilities of each partner? 

Have a clear outline of what each partner is expected to perform for the business. A clear division of roles and duties is beneficial so everyone knows what their expected participation is for the growth of the business.

What happens if one partner wants to withdraw? 

Make sure you have a buyout plan in place if one partner wishes to leave the business. Have clear cut rules about what will take place if this situation occurs. If a partner decides to leave the business, will they need to sign a do-not-compete form or other means of privacy documentation?

What happens if a partner becomes unable to work? 

Consider what will happen if one partner becomes disabled or ill and is unable to work. Will that partner draw an income and if so, for how long? Will disability protection be offered for partners in the event they can’t work?

What happens if there is a disagreement? 

One pitfall of a partnership is disagreement or dispute between partners. Nothing can disintegrate a business faster than disruption between partners. Consider what will happen if you and your partner hit a wall. Will you get help from an arbitrator? How will you handle disagreements that jeopardize your business success?

What happens if a member dies

What does that mean for a business if a partner dies and all of a sudden it is forced to deal with the family instead of the founding member? Will the deceased member’s spouse now “step into his shoes” and serve as a voting member of the LLC? What if the spouse doesn’t want to continue on with the business and demands to be bought out? What if the business doesn’t have enough liquid assets to buy back the deceased member’s interest?  The operating agreement can set forth how the situation should be handled should something happen to one of the members so that the remaining members can continue to run the business.

What happens if a member gets divorced 

Like the case of a member dying, a divorce is likely going to have a substantial impact on the LLC as the divorcing member’s spouse may end up acquiring an interest in the member’s interest (business interests are commonly characterized as marital property without additional estate planning). What does that mean for the business?  The member’s estranged spouse may end up being considered a partner/member meaning that it’s possible he or she will all of a sudden have the ability to vote as a member of the business.  An operating agreement can anticipate divorce of a member and set forth an appropriate plan in order to prevent that sort of situation from occurring.