The One Major Oversight When Organizing an LLC

It’s relatively easy to establish a limited liability company (LLC) with the state of Ohio.  The Secretary of State has forms.  Anyone can fill out a form, sign as statutory agent, sign as a representative of the LLC, and send it to Columbus to file.   When the form is processed in Columbus the new LLC exists as a matter of state law.  You can even get tax ID numbers online from the IRS.  The entire process can be accomplished relatively quickly and easily.

So what’s the catch?

As it happens, there’s a really important catch to keep in mind when organizing an LLC that many people won’t consider.  Ohio’s LLC statute and organizing process is designed to be deferential to the agreement of the parties.  It’s so deferential, in fact, that the forms filed with the state offices don’t even indicate who owns (are members of) the company.   Due to those deferential rules, it’s essential that the members of the LLC enter into an operating agreement to set forth the “rules” of how the LLC is going to operate.  The members can agree to almost anything, but it needs to be in writing in the operating agreement.

While not an exhaustive list, the types of questions members of an LLC may want to address are as follows:  Who are the actual legal members of the LLC?  How are votes handled when members don’t agree?  How do members amend the operating agreement?  What happens if someone wants to retire?  Can anyone just sell his membership in the LLC to a third party? How is the LLC going to be taxed?  How does the company bring in new investors?  What happens if someone dies?  How should the company be valued?  What if a member simply wants out of the company?  Many times, the only marketplace for a member’s interest in an LLC is to sell to the other members or the company itself – can the exiting member force that to happen?  What happens if the LLC needs more capital?  Who can authorize the LLC to borrow money?

It’s tempting to quickly file the forms necessary to get the business off the ground and overlook the operating agreement process.  However, the worst time to find out there’s a problem among members is after the business acquires assets and is successfully making money.  It’s much easier to sort through all these potential issues while the company is in its infancy before tempers are flaring and the financial stakes are much higher.  Don’t let an avoidable “oversight” cripple your business down the road.

–        Mark Coriell

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