Bergmann Law LLC

Complex issues, simplified

Tag: Operating Agreement

What is an Operating Agreement and Why Do I Need One?

Posted by on in Blog Posts, Business StructureLeave a comment

Why Your Limited Liability Company (LLC) Needs an Operating Agreement

Starting a business is an exciting venture, and forming a Limited Liability Company (LLC) is one of the most popular ways to structure a small business. While an LLC provides flexibility and liability protection, many business owners overlook one critical document: the operating agreement. Even if your state doesn’t legally require it, and New Jersey does not, having an operating agreement is essential to protect your business and ensure smooth operations. Here’s why your LLC needs one.

1. Defines Ownership and Management Structure

An operating agreement lays out the ownership percentages of each member and the management structure of the company. Whether your LLC is single-member or multi-member, this document clarifies roles and responsibilities, helping to prevent misunderstandings and conflicts down the line. Clearly defined roles and responsibilities means that disagreement and dispute are less likely as your business grows.

2. Protects Your Limited Liability Status

One of the main benefits of forming an LLC is the limited liability protection it offers its owners. However, without an operating agreement, courts may view your business as a sole proprietorship or partnership, exposing your personal assets to legal claims and debts. A well-drafted operating agreement reinforces the separation between your business and personal finances, strengthening your liability protection.

3. Prevents State Default Rules from Applying

Each state has default rules that govern LLCs without operating agreements. These one-size-fits-all regulations may not align with how you want to run your business. By drafting an operating agreement, you can customize provisions related to profit distribution, voting rights, and dispute resolution, ensuring they align with your business goals. This is, in my opinion, the single most important reason to have an operating agreement. Do not allow your business to be governed by default rules and regulations. Govern your business in the way YOU best see fit.

4. Clarifies Financial and Operational Decisions

Without a written agreement, decisions regarding profits, losses, capital contributions, and distributions could lead to disagreements among members. An operating agreement clearly defines these financial aspects, reducing the chances of disputes and providing a clear process for handling financial matters.

5. Facilitates Business Continuity and Succession Planning

What happens if a member decides to leave the business, passes away, or becomes incapacitated? An operating agreement outlines the process for transferring ownership, buying out a departing member, or dissolving the business if necessary. This ensures stability and continuity, preventing legal and financial headaches in the future.

6. Enhances Credibility with Banks and Investors

Financial institutions and potential investors often require an operating agreement before they agree to lend money or invest in your business. A well-structured agreement demonstrates professionalism and foresight, making your LLC more attractive to outside funding sources.

7. Establishes Conflict Resolution Procedures

Disagreements are inevitable in any business. An operating agreement provides a framework for resolving disputes among members, potentially avoiding costly and time-consuming litigation. Whether through mediation, arbitration, or a voting system, having a predefined conflict resolution process is invaluable.

Conclusion

While an operating agreement may not be legally required in every state, it is a crucial document that provides structure, legal protection, and clarity for your LLC. Investing the time and effort to create one now can prevent significant problems in the future, allowing you to focus on growing your business with confidence.

If you haven’t drafted an operating agreement for your LLC, consider consulting Bergmann Law, to ensure your agreement meets your specific needs. Your business’s success and protection depend on it!

All in the Family (Business)

Posted by on in Blog Posts, Front PageLeave a comment

Owning a family business can be one of life’s most rewarding endeavors. Not only can you enjoy success in your profession, you can also pass it along to your nearest and dearest when you choose to retire or at the end of your life. However, you also have to make sure your family business stays in the family.  Here at Bergmann & Good, we strongly advocate setting up your business the right way and re-visiting those operational documents as you grow, expand or simply as time goes on (and laws and statutes applicable to your business change). Operating Agreements and clear formation documents are all important parts of owning and operating your own business, but what about the later years? If you’ve set up your business properly, you should make sure that the next generation gets the best possible chance to succeed as well. Here are a few things to keep in mind when building a succession plan for your family business:

Who is going to take over?

A business should have a clearly defined structure. If you want a family business to survive passing down to the next generation (something that statistics show is often unsuccessful) you should ensure someone is lined up and ready to take over. They should be aware of all facets of the business and understand how runs. It is also worth informing the rest of your family and your employees about who their next boss might be rather than keep it a surprise.  Nobody likes a surprise.

Who is going to assume financial responsibility?

A family business can also involve members who are solely investors rather than involved in the day to day operations. Any succession plans should also involve the input of investors as they have a financial stake in the business. Any changes need to follow the rules of the operating agreement or formation documents used when the business was first established.

Is the business going to stay in the family?

If there is no one who wants to take over the business, then your succession plan could be to just sell the business and leave your family to split the proceeds. However, you should inform your family members this is your plan since selling a business can be a long undertaking. You should have a business attorney already lined up for your family to contact in the event this is your plan, that way they will have to do as little work as possible in the event of a family tragedy.

You’ve worked hard to build you family business and you’d like to have it offer opportunity and prosperity to your family and future generations.  Make sure you know what is going to happen after you are no longer around to run things. Give us a call, and protect your legacy.  Your Grandkids will thank you.

 

Why Would I Use a Lawyer to Form an LLC?

Posted by on in Blog PostsLeave a comment

Your accountant has recommended that you operate your business in the form on an LLC.  You go online and see the New Jersey state website makes filing the formation documents online very easy.  So why bother with an attorney?

Well, if you are both familiar and comfortable with the New Jersey Revised Uniform Limited Liability Company Act (“RULLCA”) then by all means, plug in your name, address and credit card number and save yourself a few dollars.  However, if you are not familiar with the revised statute then perhaps a consultation and creating a business that works best for you is the way to go.

The most significant difference between forming your LLC on your own and forming your LLC in consultation with counsel is that on your own, without an operating agreement, your LLC will be governed by the existing statute, or RULLCA.  For instance, under RULLCA, an LLC’s operating agreement may eliminate or limit a member’s or manager’s liability to the LLC and members for money damages, except for (a) breach of the duty of loyalty; (b) a financial benefit received by the member or manager to which the member or manager is not entitled; (c) a breach of a member’s duty to not consent to or receive any distribution from the LLC if the LLC is insolvent or would become insolvent as a result of the distribution; (d) intentional infliction of harm on the LLC or a member; or (e) an intentional violation of criminal law.

Having an attorney form the LLC and help you draft your operating agreement means you can set up your business exactly as you want it, rather than having to use the default rules of the RULLCA. LLC’s offer tax and liability protection whether or not you form with the help of an attorney, but working with a professional business firm maximizes those protections and makes formation costs well worth the price tag. Questions? Call Bergmann & Good.  We are here to help.