5 Reasons Your LLC Needs an Operating Agreement
Your LLC might be in danger without this very important legal document.
It’s an amazing feeling establishing your own Limited Liability Company (LLC). You’ve put in the time to fully plan out your business idea. If you’re like me, you probably spent hours debating on names, only to find that many are already taken. Your $99 filing fee has been paid and you finally get that email from the Secretary of State.
Approved!
Congratulations! You now have your Articles of Organization. Your business is now registered with the state. So, now all you need is your EIN and bank account, right?
Wrong.
Your LLC needs a governing legal document much like a corporation does. You need what we call an Operating Agreement.
What is an Operating Agreement?
Your Operating Agreement is the legal document that establishes in writing, how your LLC will be run. This agreement allows you to outline the ownership of the company, roles and responsibilities, how profits (or losses) are shared, and membership changes.
It’s also standard for owners (members) to establish how they would wind up business affairs if the company were to dissolve. These are all major rules and structures for the LLC and can help address issues as the eventually arise. Having an Operating Agreement drafted is the best way to build a structure that works best for all members.
For your personal protection and the best interest of your business, we highly recommend that all LLCs have an Operating Agreement. Although most states (including Ohio) have default provisions in place for LLCs, there are very powerful benefits to having your own provisions customized to your company needs. Below, we’ll give you 5 reasons your LLC needs an Operating Agreement.
1. Protect Your Limited Liability
There’s an uncomfortably high likelihood that your business will be sued at some point. This is especially true as you start to generate success. It would be quite risky to go into court without an Operating Agreement in place, particularly if the LLC is owned by a single member. Not doing so could jeopardize your personal liability protection, as you could be viewed by the court as a sole proprietor.
If the court sees that you have formalized the company by governing it with an Operating Agreement, your liability protection will be viewed favorably. The safe bet is to get with a business lawyer and have your agreement drafted. Skipping this step could be very costly down the road.
2. Tailor Your Business Structure
One of the great benefits of an LLC is the flexibility in how a company designs its structure. Members are able to determine how to split profits, how to distribute membership interest, and establish responsibilities. This means that profits and losses aren’t determined based solely on capital contributions.
Members can decide to split profits differently. A member can make a 30% capital contribution while their partner makes a 70% capital contribution, and still set up a 50/50 split in profits and losses based on other contributions. This flexibility doesn’t exist with all business structures and the state won’t set it up for you. You’ll need an Operating Agreement in order to take advantage of this flexibility.
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3. Your Operating Agreement Overrides the State Default LLC Rules
We constantly hear “I don’t need an Operating Agreement; my state has LLC laws.” Well, sure, but how does that align with your business interests?
Without an Operating Agreement, your state’s LLC provisions will govern your LLC. Not all the state provisions will fit the needs and goals of your company. Most business owners find it better to hire an attorney to draft an Operating Agreement complete with guidelines customized to how you want your company to operate.
It’s important to understand that there are certain state LLC rules that your Operating Agreement cannot override. Be sure to consult with your attorney to learn more about which provisions cannot be avoided.
4. An Operating Agreement is Required by Many Banks and Investors
It’s not uncommon for your bank to require an Operating Agreement. Many banks won’t let you open a business account without having this legal document. If your LLC wants to take out a loan, your lender might want to see your governing document. Moving forward without an Operating Agreement can severely limit your access to capital and business transactions.
Investors often require your company have an LLC Operating Agreement as well. Investors and lenders generally have a vested interest in confirming the legitimacy of your business before lending or investing. Don’t limit yourself. Businesses need access to capital. The trustworthiness and competence built into an Operating Agreement will allow your LLC to sit at certain table.
5. Succession Planning in Your Operating Agreement
LLCs with more than one member (multimember LLCs) should be sure to have an Operating Agreement in place. This is important not only because it establishes a contract between the members, but the agreement also answers the following business succession questions:
· What happens to your company when one of the members becomes disabled, passes away, divorces, retires or seeks to sell his or her interest in the business?
· What happens to your interest in the business if you die or become disabled?
The Operating Agreement controls what happens in the above scenarios. You don’t want to be forced into business with your partner’s widow or ex-spouse. That’s not what you signed up for. Be sure that your attorney spells out the next steps to fit your needs. Plan for these situations in your Operating Agreement by including Buy-sell Provisions.
Nalls Davis has handled many disputes amongst members of LLCs largely because they simply don’t have an Operating Agreement in place. We often see infighting within the LLC, it doesn’t matter if your business is a new startup, or a seasoned business; if you don’t have an Operating Agreement or used a DIY template, we urge you to schedule a consultation to ensure full protection of the law.
Disclaimer
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Nalls Davis Attorneys at Law and its members do not recommend or endorse the contents of the third-party sites.
Nalls Law Group is now Nalls Davis
Introducing Jacob Davis, Esq. and the rebranding process.
It’s a very exciting time for our firm. We reached the point where our hands were full, and our heads were pressing against the glass ceiling above. Simply put, it was time to scale the business.
So, we did just that by welcoming some great changes to the firm.
New Name, New Partner
The most obvious change is our name change. Nalls Law Group is now Nalls Davis Attorneys at Law! This name change allows us to present ourselves more clearly for who we are.
The addition of new Partner and Managing Attorney, Jacob Davis, Esq., has been vital to the expansion of practice areas and the development of new business. Attorney Davis brings a wealth of experience and a strong advocacy for providing solutions to clients.
“As an attorney, I want to utilize my skills and abilities to advance the rule of law, passionately advocate for my clients, and promote equity, justice, and inclusion in the legal system,” Attorney Davis states when asked about the difference he wants to make.
Attorney Davis not only strengthens the firm’s transactional areas of practice, but he expands the services into the employment and labor law and fair housing law practice. Jacob has a wealth of knowledge and experience “working on both transactional matters and litigation.”
Going deeper into his experiences, Attorney Davis says, “I have served as a trainer for government organizations and community groups with respect to Title VII of the Civil Rights Act and Title VIII known as the Fair Housing Act.” With these unique experiences, Jacob is able to provide legal solutions for clients with even the most complex matters.
Rebranding
Nalls Davis will continue to roll out this rebranding over the next few weeks. You can expect to see changes to the website, presentations, our digital and social content, and you will certainly hear more from Attorney Jacob Davis.
One thing that will not change is our dedication to our clients and community. As Attorney Davis puts it, “Clients should choose Nalls Davis because we are committed to ensuring that our clients are better off today than yesterday and better tomorrow than today. Through our team-based method, we are able to efficiently and effectively navigate complex legal issues while also providing five-star customer service.”
Couldn’t have said it better Jacob. Welcome aboard.
To schedule a FREE consultation with Attorney Jacob Davis, use the button below.
Disclaimer
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Nalls Davis Attorneys at Law and its members do not recommend or endorse the contents of the third-party sites.
5 Estate Planning Lessons We Learned from Issa Rae’s “Insecure”.
Issa Rae hits home with these 5 Estate Planning lessons.
It’s not often our favorite T.V. shows encourage us to get our affairs in order. With Issa Rae’s riveting HBO comedy series, Insecure, we were given powerful estate planning lessons.
The show follows Issa and her attorney friend, Molly, through the early adulthood challenges of young black professionals. Much of the show is awkward. The estate planning conversations between Molly and her parents in the final season were no exception.
Sure, it was difficult to watch Molly discuss mortality with her parents, David and Carol. But after her mother suffered a second stroke, with the first stroke being kept secret, it became clear that the discussion was necessary.
Following an upset outburst in response to her parents not taking the process seriously, Molly knew she had to try another approach. Something more effective and understanding. This approach leads us to our 5 Estate Planning Lessons We Learned from Issa Rae’s “Insecure”.
Carefully Approach Estate Planning Discussions
Let’s be honest, a discussion with your parents about their mortality and end-of-life plans is not an easy conversation. However, most understand that this less than desirable conversation is important.
According to a study by Independent Age, a website that offers advice and support to aging generations, nearly 80% of people believe it is important to have discussion about aging and death, yet less than a third of people have had the conversation.
To make the conversation more comfortable and productive, Nalls Law Group founding attorney Chris Nalls suggests that you “be patient. Understand that this is likely going to be more than one discussion. Don’t allow yourself to get frustrated. Patience is key.”
Initially, Molly allowed herself to get frustrated and didn’t accomplish much outside of a few requests from her parents written on loose leaf paper. Once Molly was able to reopen the conversation with more patience, her parents were much more receptive.
Bottomline, estate planning talks are difficult for each person involved. Use these tips to help discuss the sensitive topic with an understanding approach:
Listen to understand. Hear them out about their feelings and their wishes.
Know the documents. It helps to have knowledge of the basic documents of an estate plan.
Focus on living, not dying. Build the conversation around living with a peace of mind as opposed to mortality.
2. Make Estate Planning a Family Process
Molly’s big breakthrough with her parents came when they made estate planning a family process. She and her siblings sat with their parents to patiently talk through everything. They were able to help their parents understand the cost of avoiding the process of end-of-life planning.
Estate Planning as a family has its advantages. According to attorney Nalls “communication with your family now can prevent family conflict later. Problems are more likely to arise if the details of your plan aren’t known until a time of grief.” This is not a strain you want to add onto your family in an already difficult time.
Family participation, especially with adult children, keeps everyone in the know. Molly and her siblings are well aware of their parents’ wishes. “Trusted people should be left in charge of your financial and healthcare wishes in case you become incapacitated,” says attorney Nalls. “It would be wise to let your family know who those people are ahead of time, as opposed to them finding out as you lay unconscious.”
Remember that your estate plan is as much about your family as it is about you. Consider the tips below to help guide a family estate planning approach:
Use an empathy approach. Schedule discussion in advance. Allow everyone to gather their thoughts and emotions as they prepare.
Make sure everyone is heard. If adult children feel left out or ignored it could lead to family disputes down the road.
Don’t wait until serious health issues arise. The conversation is much more comfortable when the family isn’t emotionally on edge.
Be clear about roles, responsibilities, and your wishes. Help family prepare for how they fit in your wishes. Make the conversation one that helps everyone understand their role in the plan.
Don’t wait until it’s too late. Book a consultation and start on your estate plan today.
3. Estate Planning is Vital in the Black Family
Issa Rae brought the importance of estate planning in the black family to forefront with Insecure. Although end of life planning was not the primary theme, viewers couldn’t overlook the seriousness it added to the comedy. Perhaps not having an estate plan falls directly into the category of feeling “Insecure”.
A major key to estate planning is to build generational wealth by passing down your assets to heirs. This is critical within black families who continue to face a wide Racial Wealth Gap. The Federal Reserve reports that the median and mean wealth of black families “is less than 15 percent that of white families.” That’s alarming.
What’s worse is a 2015 article in Black Enterprise magazine reported nearly 70% of African Americans had “no will or estate plan” in place and those numbers put black wealth “at risk”. We aren’t doing ourselves any favors through a lack of estate planning. Hopefully seeing Molly and her family have the necessary discussion encourages other black families to take action. The following data points are staggering, and you can make a difference by getting the process started:
Nearly 70% of African Americans have no will or estate plan in place.
Inheritance may be the single biggest contributing factor to the racial wealth gap among socioeconomic indicators, according to the Federal Reserve.
Black people are twice as likely as white Americans to not know how to create an estate plan.
As put by the African American Attorney Network, lack of estate planning is one of several factors that lead to land loss in the African American community.
Your Last Will and Testament is one of the foundational pieces of your Estate Plan.
4. Estate Planning is Not Just for the Wealthy
That’s right. Issa Rae brought attention to a commonly believed estate planning myth. If you still believe that estate planning is pointless unless you’re well off, that’s completely false.
As Molly encouraged her parents to put together their estate plans, her father made it clear that they didn’t have many assets to pass down. He was quite upset with this reality. However, the family determined that all wasn’t lost due to a lack of wealth. The truth is estate planning isn’t solely about who gets your stuff when you die. Planning for yourself in the event of your incapacity is also an important part.
If you’re in the hospital lying unconscious, who will be in charge of your health care decisions? How will this person know what your wishes are? A living will spells out the medical treatments you would accept or decline to keep you alive. It provides a guide, so family and doctors won’t be left guessing what your wishes are when you’re unable to communicate. This portion of the estate plan shouldn’t go overlooked and has nothing to do with wealth.
In addition, a Health Care Power of Attorney allows you to name someone (your agent) to make medical decisions for you if you are temporarily unable to do so. As attorney Nalls puts it “a Health care Power of Attorney gives your agent power to cover all the other health care decisions outside of those covered in your living will.”
He continues on “it really is important to have both documents as part of your estate plan. It’s about having your wishes granted when you can’t request them. This is important for everyone, regardless of socioeconomic status. The COVID pandemic has shown how illness can strike unexpectedly and demonstrated the urgent need for everyone to get these documents prepared before it’s too late.”
Enough with the “only for the rich” myth. Estate planning might sound fancy and wealthy, but truthfully everyone has an estate. Below are more examples of why we all need to have an estate plan:
Planning health care directives in case of incapacity.
Designating a guardian for minor children in the event both parents pass away.
Distribution of real and personal property.
Avoid or minimize the probate process.
5. Work with an Estate Planning Attorney
The last critical estate planning lesson taught in Issa Rae’s Insecure was to hire a qualified estate planning lawyer. Molly made sure to point her parents in the direction of a trusted attorney who could best serve their needs and ensure that their documents say what they want them to say.
It can be very tempting to try the do-it-yourself or online form approach and save some money on the front end. But as stated by attorney Nalls “this can be much more costly and undermine your desired outcomes.”
“It’s easy to misinterpret the language of an estate plan form. If you’re not sure what you’re doing this could be a waste of money.” What’s worse is the disaster that can come of not using an expert. “Far too often we see that estate planning errors aren’t found until after someone passes away, which is simply too late” Nalls continues.
Estate planning gets very complex especially for those outside of the practice area. Brian Sparks, a Fellow of The American College of Trust and Estate Counsel, compares DIY estate planning to “Googling a serious medical procedure and then trying to perform it on yourself.” This is a setup for pitfalls and mistakes that can certainly be tragic for you and your family.
Molly, being an attorney herself, understood the importance of using a trusted expert for these crucial documents. She certainly didn’t want any surprises in her parents’ final wishes. Be sure to hire a trusted professional to avoid these dangers:
Not having the right documents in place to protect your wishes, family, and legacy. An estate planning attorney will help you identify what documents will best serve your needs.
Not including the right language in your documents. Should your documents fail to meet the requirements of language in your state, they might be ruled invalid in part or in whole.
Your documents don’t comply with current state law. Your estate planning attorney will give you the peace of mind that your plan complies to the most up to date laws.
Bottom Line
While enjoying the five seasons of great T.V., we can’t ignore the valuable estate planning lessons found in Issa Rae’s popular show, Insecure. Molly’s efforts to convince her parents to get their affairs in order really showed how difficult this discussion could be. Approaching family with understanding and empathy yields better results. Involving the family, especially in the black family, is vital to a successful estate planning process. Enough of the “I’m not wealthy enough” myth, we each have an estate and should have a plan. If you are ready to get started with your plan, Nalls Law Group would be happy to serve as the trusted professional you need for a customized plan that makes you feel secure.
Disclaimer
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Nalls Law Group LLC and its members do not recommend or endorse the contents of the third-party sites.