Tag Archives: operating agreement

Does your business partner have his hand in the company cookie jar?

Some people just cannot resist putting their hands in the proverbial company cookie jar.  Read on for tips for what to do if you have concerns that your  business parter is stealing money or goods from your business, or using them for his or her personal use.

First, you must act quickly and carefully to protect your interest and to keep yourself out of hot water. The first thing you should do is locate a copy of your operating agreement, partnership agreement, or bylaws.  If you never got around to reducing your agreement to writing, perhaps now you are realizing why that step is so important. Even if you do not have a formal agreement, gather any emails, letters, napkin writings, whatever, that will be helpful to prove  the agreement with your partner.  If you do not have any formal agreement, Florida’s “default” LLC rules will apply to you.

cookiejarNext, read the agreement (and consult an attorney) to see what it says about obtaining books and records of the organization. Many business agreements contain detailed information about when and how the partners or members are allowed to review the books and records. You still need to comply with “the rules” of your agreement during the time you are investigating your partner, but that doesn’t mean you can’t use all options available to you to obtain the information that you need.  For example, review (and print or save) the bank accounts of the company directly (if you have that access — as a partner or managing member, you should), talk to loan officers that work with your company, or even speak with vendors or employees of the company if you think it may be done appropriately.   Also consider whether company records on the cloud or at remote locations  might be easily corrupted or deleted without your knowledge.

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Partnership or LLC? What is best for your business?

Each Friday, I ask my Twitter followers to send me their legal question via private message or email.  I choose one question to respond to anonymously each week.  Below is last week’s chosen question:

“I am starting a business with three friends to develop a video game.  We are confused about the difference between a limited liability company and a partnership.  Can you help us out?”

There are a number of important distinctions between a partnership and a limited liability company (“LLC”).  You should discuss the details of your business’s goals with an attorney, but the following will give you an idea of the main advantages and disadvantages of each type of business.

Liability

The defining characteristic that distinguishes a partnership from an LLC is the LLC members’ limited liability. A partnership is a business operating under its owners’ names (although a trade name might be used).  The partners are personally responsible for the debts of the business. That means they could lose their personal assets, such as a home, car or certain investments to satisfy the partnership’s debts.  Also, if the partnership owns assets, such as a building or vehicles, the individual partners also personally own those assets in proportion to each partner’s contribution to the business, or as arranged in a partnership agreement. If no agreement exist, the statutes dealing with partnerships will apply standard rules.

An LLC, however, is an independent legal entity and owns property, enters contracts, and loans or borrows money separately from the individual members. The members will generally not be liable for the LLC’s debts or obligations. It acts as a “corporate person” and all traditional duties of a business are carried out in the name of the LLC only.  Members must be careful not to “commingle” their personal assets with that of the LLC, or a court might determine that the LLC is merely a “shell” for the members’ personal use and find the members liable for obligations of the business.

Forming the business

Partnerships are formed as soon as two or more individuals begin doing business.  No formal filing is necessary to “start” the business.  However, it is always advisable that a partnership agreement is in place to outline the contributions, distributions, and responsibilities as they relate to each partner.  Further, a business license or fictitious name registration may be appropriate.

An LLC can be owned by one or more people, known as “members.” An LLC is generally created by registering with the state of formation, as well as any states where it is conducting business. Paying a fee is required, although this fee is generally quite low.  An LLC should always have an operating agreement, even if it has only one member, to lend legitimacy to its corporate status. Read more about this HERE

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What is an operating agreement and why does your LLC need one?

An operating agreement governs the financial and functional operations of your business. It is a contract that is binding on the members of the LLC and ensures uniform and consistent handling of business matters.

Here are four reasons why your LLC needs an operating agreement:

1. Liability: An operating agreement helps give the members of an LLC protection from personal liability and confirms the LLC’s status as a true business entity. Having a clear operating agreement ensures that the LLC is not confused with a sole proprietorship or partnership. Simply filing your LLC with the state does not prevent you from being held personally liable for the debts of your business. Courts will look to many factors to determine whether your LLC is merely a shell for your personal use, such as whether company and personal funds are kept separate, whether the business was adequately capitalized, and whether an operating agreement is in place.

2. Misunderstandings among members: Perhaps your and your best friend are starting a flower business together. Or maybe you and your brother are finally opening up that restaurant you always talked about. You can never imagine arguing with this person over the operation of the business. Wake up and smell the reality: misunderstandings, disputes, and even expensive lawsuits result when people do not take the simple step to develop an operating agreement. You need to memorialize things like how much money each person is contributing to the business, how you will get paid when the business begins to take off, who will manage the day-to-day operations, and so on. There are many things to consider, but speaking with a qualified attorney can narrow the issues that are important to your type of business and make the agreement as basic as you like, or as detailed as necessary.
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5 Things to Consider Before You Create a Limited Liability Company in Florida

The Limited Liability Company (“LLC”) has gained popularity in recent years. Often thought of as a merger between the corporation and traditional partnership, creating an LLC is an important step towards legitimizing and protecting your business. Here are five things to consider before you get started.

  1. Your Goals: An LLC is one of the most flexible business entities you can create due to drawing the best qualities from partnerships and corporations. For example, LLCs provide the limited liability protection of a corporation and tax benefits of a partnership. However, members can elect for the LLC to be treated as a corporation for tax purposes, and a single-member LLC will result in the owner being taxed as a sole-proprietor.  Members are free to decide how management will be structured, how contributions and distributions will be allocated, who has managerial control, and whether or when capital calls will be necessary.  An LLC is limited in some respects.  For example, if you ever plan to take your company public you will have to convert to a corporation, which may result in tax consequences. Also, LLCs may not be attractive to companies that need to raise significant funding from investors or venture funds, as tax consequences to those outside investors may be problematic.
  2. Choosing a State for Organization: LLCs are recognized in all 50 states. While states like Delaware, Nevada, and Wyoming are generally considered to be favorable states for registering an LLC, if you do business in any other state you will need to re-register as a foreign company in that state. In the interest of keeping costs low, you should generally register your LLC in the state that you intend to conduct most of your business.  Florida’s LLC fees are relatively low and registration is easy.   Continue reading →