Yes, you need an operating agreement for your LLC. Part #2
Phew! We made it through two sections of an operating agreement in my last post. Now that you know who is a member and how profits and losses are spread, what about management?
Focus area #3 - Management
In Wisconsin, LLC’s are subject to two management schemes: a member managed structure and a manager managed structure.
Member managed means just that - the members run the company. For effective member management of an LLC, voting procedures are extremely important because, without voting systems, chaos rules - members get upset at other members, accusation fly, and the LLC is at risk if collapsing because nothing gets accomplished. You can determine which matters require majority, supermajority, or unanimity for approval. It
Committees can be established to grease the decision-making process or to handle any other internal matter (ex: operations, finances, etc). Included in committee structures are rules on appointment, removal, and resignation of committee member - administrative stuff that demands in-place procedures. The ability to legally bind the company must also be outlined, such as who can sign checks or contracts on behalf of the LLC - the left hand should always know what the right hand is doing in a business.
Manager managed LLC’s are quite a bit different. A manager (or managers), selected by the members, runs the LLC. Several points are important here: (1) how the members select the manager(s); (2) the term served by the manager(s); (3) and the authority of the manager(s). Other relevant matters include compensation and removal processes. In some cases, LLC’s find it useful to have a committee of managers, due to the company’s administrative and operational complexity.
Focus area #4 - Dissolution and related matters
An operating agreement outlines when the LLC will dissolve (in short, not exist any more). Historically, Wisconsin’s statutes outlined these events, but the power was shifted to the LLC’s themselves. Often, dissolution events include death or severe injury to a member, but there are better ways around such unfortunate events. Buy-sell agreements can be built in to prevent the LLC from folding. Buy-sell agreements can involve insurance policies on each member so that the LLC and the member are guaranteed some form of economic survival should inopportune events arise. Further, the members can control who might replace the lost member and not face issues with the former member’s spouses and children. The reality is that well-drafted language regarding events of dissociation and dissolution can prevent painful headaches and massive litigation bills if relationships crumble amongst the LLC members and managers.
General Thoughts:
- It’s easy to get excited and move forward with a business before business matters are properly resolved. The honeymoon between all LLC members eventually comes to an end. Think preemptively at every turn.
- Always, always, always get things in writing; again, think preemptively.
- You will sleep better knowing that your business has procedures in place and in operation from Day 1 - reliable procedures allow a business to run more effectively.
Now, I’ve illuminated a few important areas where a good operating agreement can sustain a growing company. There are many other areas necessary to create a good operating agreement that I left untouched. Regardless, consider the value a good operating agreement can bring to your budding business.
Chris Moander is an independent attorney based in Milwaukee who is passionate about helping growing business navigate the legal waters of Wisconsin.
