Nichole Y. Shafer
Guest Columnist
When creating an entity, a common misconception is that anyone can set up the entity on their own since it is “just a filing with the state.” Since it is just a state filing, an attorney does not provide any additional services that an individual could not do on their own.
This is not true. In most instances, the biggest part of entity creation that attorneys assist in is in developing rules that govern the entity. For an LLC, the rulebook is called an “operating agreement.” For a corporation, the rulebook is called “regulations.” These rules describe the different roles that multiple owners in the business can and will undertake and how the entity should handle certain circumstances.
Thus, even if a business has only one owner (for LLCs, that owner is called a “member,” and for corporations, that owner is called a “shareholder”), that owner would still need their rulebook.
Items that are typically found in an operating agreement, or OA for short, for an LLC include the liability protections that the entity provides to the owner, which is a primary reason for a legal entity being used.
Additionally, the ownership information is found in the OA. The OA will list all of the LLC’s owners, their ownership interest percentages and their contribution amounts.
The OA typically also goes into detail about how the management of the LLC should be. This would include the management structure and who is responsible for making decisions. This information is all information that third parties would need when trying to decipher who can make what decisions on behalf of the LLC.
An obvious topic that is discussed in an OA is how the company shall manage profits and losses. Specifically, it clarifies how the LLC will determine how profits and losses will be allocated.
A written OA may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties. An OA typically outlines who has voting powers in the LLC and how the voting process on various topics shall work.
The process for how to handle the death of a member is also oftentimes outlined in the OA, as well as what powers the new owners have based on acquiring their ownership through the death of a member.
When the LLC is done doing business and is ready to be dissolved, the OA will outline the details of the dissolution process and how the LLC is to get rid of liquid and non-liquid assets.
One of the biggest advantages an OA can provide is that it can help prevent the transfer of an ownership interest to third parties without consent of the member if a lawsuit or judgment order occurs. However, an OA may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied covenant of good faith and fair dealing.
While Ohio law does not require an operating agreement, it is highly recommended to give an LLC added protections and to outline for the world the rules of the LLC.
Nichole Y. Shafer is an Ohio-licensed attorney at Schroeder Law LTD in Putnam County. She limits her practice to business, real estate, estate planning and agriculture issues in northwest Ohio. She can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.
