LLC OPERATING AGREEMENTS (OA's)

Tons of sample OA's available online

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Hey small biz-person!  Go find an Operating Agreement yourself, and use this information to adjust that to your specific business. You may still want to take your work-product to an attorney, but at least you will be prepared and informed.

Potential OA Strategy

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Many good biz-persons build your OA over time, piece by piece. Start your negotiations with your partners via e-mail, and then (eventually) incorporate all that into an OA. 


Next, plan on changing your OA a lot. A good OA should be treated like a living document that grows and changes with your business, and grows and changes just like people do. After all, a company is considered to be a type of living entity.

Impress Inventors with your OpAgreement terms

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Many inventors do not know how to seek capital. Its difficult, and the odds are not good. However, there are steps an inventor can take to increase these odds.

Why an LLC? Why not an INC?

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There is a time and place for INCs, but most of our clients are not at this time and place.  Remember, INCs are a lot more work and have a lot more legal requirements and formalities than an LLC. INCs also have a lot more details to get wrong and anger the IRS.

Avoid Legalese! Make your OA reflect your own language. Write as you think!

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Operating Agreements can be in plain English, it is not necessary that they be overly formal and legalistic.   The important thing is that the Op Agreement truly reflect the intent of all parties. Its more enforceable this way.

Passive v. Active investors, the many different types of equity, the "myth of 51%", the "myth of con

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Shark Tank has its merits, but in some ways is misleading. There exists the "myth of 51%", and the "myth of control".  These concepts, though entertaining, tend to completely overlooked the reality of Fiduciary Duty to the overall LLC.

OPERATING AGREEMENTS AND YOU

Start from your own legal documents

By your arrival here, we are going to assume you are trying to learn about Operating Agreements (OAs), either to completely build one yourself or (better yet) being informed and aware of your OA rights prior to contacting an attorney. Certain aspects of Operating Agreements will make perfect sense to you right away. 


It will not matter that you are not an attorney, some portions of an Operating Agreement should make sense to you right away. Should make sense to any business-person.


A first important point is that this law firm encourages people to find sample legal documents and templates, from e.g. documents.google.com or just a conventional Google search, and use them.  yes!  Seriously!  We want that!


POPULAR ATTORNEY RESPONSE

Danger! Avoid this! Have an attorney review everything, otherwise certain claims, clauses, portions may be unenforceable!


TO THIS I SAY:

Some founder-drafted Op Agreements look just fine. Enforceable, understandble, etc. But then, an attorney got ahold of it, and the attorney fiddled with the language such that certain portions were Rendered Unenforceable. Plus charged a $fee for doing so.


This is not to say that documents found on the Internet are guaranteed to be  reliable. Instead, these documents can be a useful starting point. A place where a person can start their learning process, and be informed.


This website, and our YouTube channel, do not post example Operating Agreements. It would not do any good, and nobody would read them. Instead, we assume you have already found one and are trying adjust it to your specific business. Instead, view this playlist on YouTube and walk yourself through the Operating Agreement process.


Another important but neglected part of an Operating Agreement is a need to update it OFTEN. People change, businesses change, times change. An Operating Agreement should not be a static document, but instead should be re-executed periodically, e.g. every 6 months, to best reflect the state of that business at that time.


Below is an example using a 3-member LLC, between Pam, Lori, and Mark.  Lets assume the LLC is very low on operating cash at the time, but is not dead. It just do not have enough free cash to pay the minority members in cash. Lets assume Pam is the principal Member.  Below is an example e-mail.


EXISTING EQUITY

Pam 68%, Lori 16%, Mark 16%.


PAM

Folks, thanks for your efforts recently. I hugely appreciate it. While we are still low on cash, I want to recognize your contributions.  The only way I can do this is to change your memberships interests (equity).


Unfortunately, the LLC is still not throwing off enough in cash that we can do any kind of profit-sharing or cash-distributions. I do anticipate that event by early next year.


Lori, over the last 6 months you have provided a lot of benefit. For your assistance at XXX trade show, plus taking all those phone calls, and debugging that one big problem, I will bump your equity stake from 16% to 18%.


Mark, over the last 6 months you have provided a lot of benefit. For your assistance with Google Adwords, keeping our Keywords current and also changing and find tuning the language of the Ads, as well as other efforst you have made, I will bump your equity stake from 16% to 18%.


NEW (CHANGED) EQUITY

Pam 64%, Lori 18%, Mark 18% (as of Oct 9, 2019).


I have posted a new copy of the Op Agreement on Drop-Box.  Could you both please indicate your assent to these changes by e-sign within Drop-Box. If you do not overtly sign on Drop-Box within 45 days, I will construe your lack of objection as assent to this change.






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Law Firm YouTube channel

This Youtube channel is aimed at inventors, entrepreneurs, and small businesses that want to do as much self-help as possible. This specific playlist relates to LLCs and Operating Agreements.

CONVERT EMAILS\TEXTS INTO ENFORCEABLE OP-AGReements

Everything starts informally.

Operating Agreements can be in plain English, it is not necessary that they be overly formal and legalistic.   The important thing is that the Op Agreement truly reflect the intent of all parties. Its more enforceable this way. 


Many companies start out with verbal agreements, informal agreements. Facebook is but one of numerous examples. These are fine and are enforceable, if handled properly. This can include short e-mails and texts (example below).


The below dialogue is an example email/text which can be inserted into a workable Operating Agreement. Lets say the two parties are named Eric and Sara.


FROM SARA: 

Eric, lets firm up what we talked about. If you put $15K into my LLC, you will own 25% of it. Did I understand you correctly?  If I heard you right, please reply back.


FROM ERIC: 

Yeah. Lets do it. 


FROM THE ATTORNEY: 

This can be an example of a binding Agreement, and legally enforceable.  However, people don't realize this and over-think the process, and think the process needs to be way more complicated than it is.  START WITH SIMPLE E-MAILS!  BUILD FROM THAT


Note one important implication (un-stated): this Agreement does not become binding until Eric tenders the $15K. However, at that time, Eric should grab any example Op Agreement from the Web, and start coding up a working document, and get it to Sara. 


Start the drafting process!  I wish more of my clients would show that type of initiative.


Another important part of an Op-Agreement that is often neglected by founders: initial contributions of members.


     

Member Name:  Explanation - - Assessed Value of Contribution

 

Steve Jones:   $4000 cash, primary inventor on 2 patents, 25 hrs/week of work. Taking the biggest   risk, quit his day-job.  - - Assessed value $80,000

 

Robert Schmidt:  $4000 cash, secondary inventor on 1 patent, 10 hrs/week of work. Did not quit his   day-job. - - Assessed value $30,000

 

Alice Elder:  Transportation,   co-signer on office lease, reduced costs on airline tickets, presence at trade shows. Retired, no day-job to quit. - - Assessed value $20,000


Have this Agreed-Upon before you sign the Op-Agreement!  Prevent later fights and arguments!



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START WITH LLC, TRANSFORM TO INC

INCs are often premature

 There is a time and place for INCs, but most of our clients are not at this time and place.  Remember, INCs are a lot more work and have a lot more legal requirements and formalities than an LLC. INCs also have a lot more details to get wrong and anger the IRS. 


This section will be filled in more as time goes by. Suffice to say for now, an LLC should be the first option, the need for an INC is often misunderstood.  INCs are not a do-it-yourself product, not anywhere near as much as LLCs.

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OP-AGREEMENT LANGUAGE

Inventors often Neglect This

EXAMPLE INVESTOR AMOUNT: $250K cash contribution, for e.g. 20% Equity and % from sales.  Assume "PASSIVE" investor.


EXAMPLE OF HOW LLC WILL USE THE MONEY (be Exact)


Principal LLC Authorized Member gets paid $40K/year salary.

More aggressive Internet strategy, website optimized for e-commerce: $15K.

Assistant (e.g. college student) gets paid $15K/year.


Expand from existing 2 vendors to e.g. 5 vendors, start placing larger orders thereby achieving gains on margins. Spend $2000 on different equipment, different promotions and devices to turn inventory faster. Experiment with new vendors, try out different product lines. Expand the geographic area to include planes not just cars.


Trade Show presence: 3 shows at $8500/apiece, total $25,500.


TOTAL THUS FAR: $97,500.  The remaining $152,500 stays in the LLC bank account to be used for Ordinary and Necessary operating expenses.


Investor gets 65% of post-expense profit in first $80K of sales. Meanwhile, principal LLC Authorized Member gets 15% of profit in first $80K of sales.  15% of the post-expense profit is put back into the LLC bank account.


THIS SHOWS LLC COMMITMENT TO THE INVESTOR. THIS SHOWS AN INTENT TO ENSURE THE INVESTOR GETS THEIR INITIAL INVESTMENT PAID BACK QUICKLY, RATHER THAN BEING STUCK WITH SHITTY EQUITY-ONLY (i.e. non-cash) IN A NON-PERFORMING LLC.  It also shows EXACTLY what will be done with the $cash.  Ahead of time.


Following from above, if sales >$80K occur, 

Investor gets 60% of profit in next $40K of sales. Meanwhile, principal LLC Authorized Member gets 25% of profit in next $40K of sales. Again,  15% of the post-expense profit is put back into the LLC bank account.


This 2nd condition is to show that the Principal LLC member is willing to put the investors interests ahead of her own, but if the company is doing well, she would like to be paid an over-ride.


In such a case, there is no dispute or disagreement that could be settled by a brute force assertion of who owns 51% and who owns 49%.  The main usages for the money are already decided, and not subject to any kind of vote or disagreement. Anyway, the whole issue of LLC decisions being dictated by who owns 51% and who owns 49% is a myth anyway, and ignores the issue of Fiduciary Duty, as discussed here.







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Shark Tank and "myth of 51%"

Fiduciary Duty hugely more important than 51%

 Shark Tank has its merits, but in some ways is misleading. There exists the "myth of 51%", and the "myth of control".  These concepts, though entertaining, tend to completely overlooked the reality of Fiduciary Duty to the overall LLC. 


All members of an LLC, and particularly a member authorized to make purchases >$5000 and contractually bind the LLC to leases and other obligations, that person has a fiduciary duty to act in the best interests of the LLC, no matter what.  All 50 states in the United States require this.  Thus, the idea of "bringing it to a vote" or that anyone can say "I own 51%, therefore this is what we are going to do", or "I own 51%, therefore I retain control", THIS DOES NOT HAPPEN.  This is a MYTH.


"Shark Tank" constantly references the Sharks fighting with founders over e.g. 51% v. 49%, and "control". Please be assured this is for mere entertainment purposes. Further, all of the Sharks are strictly passive investors, and not involved in day to day activities of the LLC. They do not want "control".

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