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Why An Attorney Should Review Your Operating Agreement
In this audio snippet, you'll hear about:
- LLC is very flexible, which can be good or can be bad based upon how the operating agreement is structured
- One successful client almost unknowingly signed an operating agreement that would have help him personally liable for all debts of the company
- It doesn't cost that much to have it reviewed
Audio Transcript
Yosef:
Let me just say this about LLCs, and I see this often. I can tell you
just a very quick brief story about what happened with an LLC client of
mine that had invested in Michigan.
Travis:
Great. I love stories.
Yosef:
What?
Travis:
I love stories.
[laughter]
Yosef:
Now this client, he's a very savvy investor. He's worked very
successfully over the years, made a whole to of money in a lot of
different areas. He had a cousin who lived in Michigan and who wanted
to invest some money in real estate development.
So
his cousin took out the standard LLC agreement and wanted my client to
sign it. Of course, my client saying, 'Well what's the big deal? I mean
it's my cousin.' It's apparently the standard agreement that he always
uses.
I said, 'No, you're not signing anything without me
reviewing it first.' Believe it or not it doesn't take an attorney that
long to review a standard LLC agreement.
But the irony was
that the LLC agreement was written so poorly that to have my client
actually sign that agreement, he would have opened himself up to such
enormous amounts of liability, I mean, I would have been sued.
Travis:
[laughs] Really?
Yosef:
Yeah and just because the way the LLC agreement was structured in this
particular case the client was accepting all the personal
responsibilities for the debt.
Travis:
Oh, wow.
Yosef:
I don't think the developer realized what was in that LLC.
Travis:
Wow.
Yosef:
Nonetheless...
Travis:
That's huge.
Yosef:
This settlement would not happen under a corporation. It just wouldn't
happen because of the ways the bylaws are configured in a corporation.
Travis:
Going back to the flexibility of an LLC, it can be good or it can be bad.
Yosef:
That's right. That being said, it's really important for people review
LLC agreements, and review them carefully. They can be very flexible
and that can be a huge advantage. It can also be a huge disadvantage.
Travis:
Right.
Yosef:
And on top of it all, the laws governing LLCs are different in each
state. So a perfectly well crafted LLC agreement in California will
have quirks in Michigan and New York.
Travis:
Right.
Yosef:
So it's really important.
Travis:
I know that in my personal case, I just had you review an LLC operating
agreement for me a few weeks ago and it didn't take that long. You
uncovered some things inside of it that are just extremely important
that I would have never caught.
Yosef:
Right. To be honest with you, you started with a very conventional LLC
agreement. It was drafted using you know just boiler plate. But that
boilerplate can get you in trouble when you don't have somebody
representing you that's thinking about your risks.
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