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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 Antionette Gobern, have a nice day.
- Ema Tollefson, Staff Member
Thanks for this interesting article
Thanks panijhungovaH your participation is very much appreciated
- Ema Tollefson
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I've studied feminist philosophy at Columbus State University in Columbus and I am an expert in fuzzy logic group theory. I usually feel shocked. My previous job was web art director I held this position for 23 years, I love talking about beachcombing and larping. Huge fan of Megan Thee Stallion I practice wrestling: greco-roman and collect beanie babies.
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