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Written by : Betsy Fillo |
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hi guys clint coons here with anderson business advisors and in this video we're going to talk about some of the stupid mistakes people make when it comes to creating their llc operating agreements all right let's get started okay so i'm going to talk about some mistakes that i see oftentimes when i review existing operating agreements that people have set up with either inexperienced attorneys that are not familiar with creating operating agreements for real estate investors or worse yet you went on the internet right you went to legal do i mean zoom.com and said give me an operating agreement and you think you're protected this happens all the time people have these operating agreements that they're owning real estate under they're operating their business under and they don't know what's in there or more importantly they don't know what's missing and as a result of it this will come up when you're involved in a lawsuit and it could come back to bite you well i want to give you eight issues that i see many times in operating agreements that you should look to avoid in putting together your llc operating agreement okay so what is the first one the first issue i have is going to be member managed all right we don't want to do member managed if you're not familiar with this when you set up an llc you have different uh styles of running that company it can be either manager managed or member managed now the reason i don't want to do member manage is because in a member managed context all of the members can exercise control so if you want to do something in the future like gift away part of it to your children and then you want to sell the property guess who's permission you have to get your kids you want to refi the property you got to get your kids permission to do it keep that out of there so the other problem with member managed is when you file with the secretary of state many times the secretary of state would like to know who were the members if you set up a member managed llc then they want you to list the members so now you disclose the fact to the world at large that you own this llc not a lot of privacy there the other side of the coin is what is referred to as a manager managed llc and even though you're going to be the member and the manager still i like to set them up as manager managed because it tells everyone hey this is a person that has control they run the company if you give ownership away later on to your children or someone else you're still in control and you never lose that control so i would avoid member manage and opt to go always with manager managed limited liability companies unless you're using one of my strategies where we're looking for anonymity then forget what i just said but when you're setting up an llc and you're not doing the anonymity side you can look at my other videos on that with wyoming limited liability companies and setting it up that's going to be a little different in that context okay number two this is a bad one number two is going to be forced distributions okay so what does that mean so in a limited liability company you have the ability right to distribute money out to yourself that's called a distribution so you have your llc let's see here's my llc right here it's got some money inside of there i'm a member and i take money out okay when i take money out as a member that's called a distribution now the problem i run into in you seeing on operating agreements is they have provisions in there that require the company to distribute the profits on an annual basis to its members or distribute enough money to its members to cover their tax liability now that may seem great on at the outset when you look at that hey great i get money out of my company but remember it's your company you control it why do you have to have an operating agreement tell you what you need to do why not allow the operating agreement to give you discretionary authority to make those distributions here's why it's important let's assume that you're sued and they get a judgment against you and they file a charging order on your limited liability company and you've know all about charge owners by now if you've been a member of my channel for for a while that you don't have to distribute any money out creditor doesn't get paid but oh wait a minute your operating agreement doesn't give you that discretion any longer because your operating agreement forces you to distribute money out of it see what can happen you could have a judgment entered against you charging order entered against your llc you sit back and you say well this company's not making distributions they pull up your operating agreement and say you see right here it states you got to distribute out all the profits on an annual basis so that is a trap do not have any language in there that forces you to make distributions which brings me to my third point in this you want to make sure that your operating agreement has what's called non-pro rata distributions all right so that is another important clause that goes right along with that and with non-pro rata what it means is that if there's multiple members in your llc you don't have to make distributions equally let's say i created this limited liability company and i have another partner involved and this partner here is going through a divorce and so that partner doesn't want to take any money out right now because it's just going to complicate their divorce so they want to keep the money inside of the company well what does that do to me so i need the money i want to take the money out well if it's pro rata distributions and we have a hundred thousand dollars in here then you would have to divide it up 50 50. 50 50 like that so i would get 50k and my partner over here she's going to get 50k and then possibly that money is going to go into the attorneys and get spent and disappear so if i have non-pro-rata distributions it allows me to take my money and i don't have to give it to my other partner think if you had kids involved same scenario here right you have a couple of children involved in your llc at some point in the future just because they're there doesn't mean they get money you decide who gets the money out of the entity and it doesn't have to be equal so you'd want to create your entity with non-pro rata you'll see that in the distribution clause right the fourth issue is going to be no charging order language okay this is important to have in your llc to state that in the event a member is under duress that your company if the charging order is entered against you that you do not have to distribute money to them that they cannot take your interest from you that if a court tries to award their interest they become an assignee not having charging order language in your llc agreement that addresses these issues can be a problem if a lawsuit develops and a judgment's entered against you you may lose your interest or the person that is awarded your interest a suit can assume control over your company so you want to make sure that you're limiting that which brings me to my next point five restriction
Thanks for your comment Verona Savitts, have a nice day.
- Betsy Fillo, Staff Member
okay so you formed your LLC and somebody told you that you need an operating agreement what goes into that that's we're gonna talk about in today's episode hello my name is Jim Hart I'm the founding attorney here at Hawthorn law I started Hawthorn law and helped online entrepreneurs creators and visionaries like yourself figure out how to protect your business legally and grow something and build something that truly matters in the world and today what I want to talk to you about is your operating agreement and by the way if you're not sure what an operating agreement is or what it does I've got a link up here too for mistakes that entrepreneurs make when they're forming the LLC not happening operating agreement is one of them and we talked to you about that about why that is in that video so check that out an operating agreement does a lot of things basically what it is it is a contract between you as the business owner and you as the business owner if you're a single member LLC or your business partners if you are a multi-member LLC about how the business is going to be run different things that you're gonna do and we're gonna we're going to talk about all that here today what goes in the operating room it's basically the backbone of your business at the foundational document there's going to talk about everything you need to know about how to run and operate your LLC makes sense also does a huge thing is it keeps people from piercing the corporate veil if you've got an operating agreement in place and you can show that you've been following the operating agreement then if you ever were to get sued then it's gonna keep people from going through your business to try and get at your personal assets which is something that that that's one of the reasons we start an LLC it's called a limited liability company for a reason you're trying to limit your liability in the event something goes wrong with the business so let's talk about what goes into an operating agreement so the first section you want to have in your operating agreement is it's just a preliminary section that's gonna have a name your name the name of the business the purpose of the business who the registered agent is what your address is what state are you forming the business and all those type of things are going to go into this initial section of the operating agreement the next section of the agreement is going to talk about how the business is going to be managed and by managed I mean is it going to be member managed or is it going to be manager managed there's differences between those two that's probably a good subject for a future video make a note to self talk about member manage versus multiple member Vantage versus manager manage as a tongue-twister isn't it so that's the second secretary you need to make a decision about that a lot of people make mistakes when it comes to deciding how they want to manage their business and whether it's gonna be one or two one or the other and they just go and file their corporate paperwork and don't really think anything of that but it is an important decision if you if you did the wrong thing if you made a mistake don't worry you can change that later not a huge deal but that's just something you want to be aware of when you're drafting an operating agreement next section is who are the members of the LLC your going to have a list of all the members of the LLC it might be that it's just to you it might be that there's other people whoever it is you want to have a list and you want to include that in the agreement next section of the upper agreement how is your LLC going to be taxed you need to make sure you have that information in the agreement and you need to decide that ahead of time because there are strict deadlines as to when you can make these elections come on cycle whether you want to be taxed as just a sole sole proprietorship or partnership an S corporation or C corporation you need to make that election and you need to decide that and you should typically include that in the operating agreement cool makes sense good and by the way if you haven't already subscribed to the channel I would greatly appreciate if you just take a minute hit the little button down there below and hit the subscribe button hit the bell thingy so you'd notify whenever we post new videos every Tuesday and Thursday evening and also give us a thumbs up because we like the thumbs up I mean who doesn't like a thumbs up alright back to the list the next section of the operating agreement you want to put in there how much money are you going to contribute how much money are the other members are going to kind of contribute to the LLC one of the big benefits of an LLC versus other things is your ownership does not necessarily have to be in proportion to how much money you've contributed to the LLC with an S corporation for example if you're filing a straight S corporation and it's not an LLC you've got a corporate entity and then you made X election status the ownership interest in the corporation the shareholder interest has to be in proportion of the amount of money that was contributed that's not necessarily the case with an Alice see there's a lot of flexibility there in terms of you can one person contribute a lot of money and the other person can contribute a lot of sweat equity and they could be 50/50 members of an LLC which is a nice benefit to an LLC versus an S corporation that's just an aside next section you want to put in there is how and when our contributions and distributions can be made from the LLC so how much money are you going to be expected to put into the LLC on a regular basis or alternatively how are you gonna decide when distribution should be made from the LLC how are you decide how much money you're going to make in a salary versus distributions versus profit whatever you want to include something about that in your operating agreement but next you want to include just some general legal provisions in the operating agreement what type of Records are you going to keep who the officer is going to be of the LLC or you can vote yourself as a president or manager or something like that how often are you going to have meetings for the LLC annual quarterly something else all that needs to be included in the operating agreement and then you need to show that you've been actually following that so the last section well there's one other section after this but the last major section is how are you going to make changes or amendments to the operating agreement you want to include a section in there it talks about how you might make changes to the agreement if something were to happen and then the final section is going to be signatures and that's so that's where you and all the other members are going to sign the agreement to say that you basically ratify the agreement forming the LLC yada yada yada also you can include spousal a spousal consent if required by your state at the state where you're filing the LLC some states require to that some states don't you want to check with your state rules the other thing I'll tell you about
Thanks Rich your participation is very much appreciated
- Betsy Fillo
About the author
I've studied arithmetic combinatorics at Marymount Manhattan College in New York City and I am an expert in geophysics (outline). I usually feel anxious. My previous job was order clerk I held this position for 20 years, I love talking about knitting and rafting. Huge fan of Pen+lope Cruz I practice balance beam and collect handbags.
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