Forming a Multi-Member LLC? Here’s Why You Need a Customized Operating Agreement

Stephanie Melnick

Entity Formation,
Business Advice,

An LLC is a popular tool for small businesses for lots of good reasons. Read more about those reasons here. But DIYing an operating agreement from various online sources is risky since it’ll be maybe enforceable, maybe what you actually want and need, and maybe complete. A customized operating agreement is the best way to manage your business your way for at least five reasons.

  1. Run It Your Way. One essential benefit of LLCs is that you and your partners get to decide how to run your business. This flexibility is a huge benefit of LLCs. Plus, if you don’t decide and document those decisions, state statues and case law will control instead. Take your most important business decisions out of legislators’ and judges’ hands and document them in an operating agreement.
  2. Cash on Demand. An essential decision LLC owners should make is whether members can be required to contribute cash, or more cash, and if so, under what circumstances. There are good reasons to allow LLCs to seek capital from members, but you’d hate to be surprised with an unexpected cash demand (especially if your ownership percentage is less than your partners’).
  3. How to Get Out. Suppose you want to move to Santa Fe and open an art gallery, retire to Phoenix, or take a full-time job at a non-profit. What happens to your LLC and your membership interest? Can the LLC continue without you? Does it have to buy you out and if so, for how much? Can the other LLC members force you to stay? How to voluntarily terminate an LLC membership interest is one of the essential decisions members should make and document well before the business takes off.
  4. How to Force Someone Out. The two LLC owners are not a good fit or one of the members does something improper or even illegal. Can the LLC remove them and what happens to their investment? These are sticky questions that you don’t want to be deciding (or arguing about) while picking up the pieces. Think through the problems and figure out solutions before the LLC is up and running.
  5. The 3Ds. LLC members can plan for what will happen if someone dies, becomes disabled, or gets divorced (really important in marital property states like Wisconsin). Decide on a process to treat the member’s family fairly while also protecting the business.
  6. Wisconsin Bonus: At least in Wisconsin, the operating agreement can limit, or not, which LLC records members may access. We’ve read the cases and know why this is important. Let’s talk.

A personalized operating agreement is the best way to take advantage of all the flexibility LLCs offer. We’d love to talk about how this could benefit your business (and the risks if you don’t). Already have an operating agreement? We’ll review it and tell you what we think. Book an exploratory call to learn more.

Stephanie Attorney

Stephanie, owner of Melnick & Melnick, S.C. and self-described law nerd has been practicing law for over 25 years. Stephanie loves taking a deep dive into clients’ businesses to learn what makes them tick. She also relishes a well-written (short and simple) contract and is pleased to draft and negotiate all kinds, including leases, operating agreements, and terms of service.

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