The Wrong Operating Agreement

There are a lot of places online who will sell you on the promise that an Operating Agreement for your new limited liability company (LLC) is something that you can do yourself just by filling in a few blanks and sending them a nominal fee. Legal Zoom calls this a "custom" Operating Agreement. Of course, by "custom" they mean that they'll install the name of your company and your members in it. They won't ask you any questions about your business, the nature of the ownership structure or anything else for that matter. You can even buy a prefab Operating Agreement at Office Depot - just fill in the blanks, and what could go wrong, right?

The problem with these agreements is that they assume a membership situation which was a lot more common when LLCs first became popular. At that time, it was common for LLCs to be much like other partnerships, where all of the members were contributing capital and would base their membership percentages based thereupon. In the Operating Agreements for those types of companies, the equities between members were fairly simple, and there was no need for preferential financial treatment for anyone. The problem is, that as LLCs have become more and more popular (based on their tax advantages, flexibility, and minimal corporate maintenance) another, more popular, structure emerged.

In most start-up cases when an LLC is used, there are both "money" members and "sweat equity" members. The "money" members mostly (if not wholly) contribute cash for their ownership position, and the "sweat equity" members contribute their services (both past and future) for their ownership positions. This is a great way for investors to get money to entrepreneurs they believe in, and for those with talent and vision (without a whole lot of cash) to get businesses started and successful. But, these members are in vastly different positions when it comes to the finances of the company, and how they would need to be compensated in the case where the LLC is dissolved.

Unfortunately, these prefab or marginally "custom" agreements don't cover that. Just because you have a common business arrangement doesn't mean you can use a "standard" document. For only a little bit more money than you'll pay for something useless from a huge company that is forbidden from actually offering legal advice, you can have a lawyer make a few small modifications to a "standard" agreement which will actually make it "custom" and will actually give you an Operating Agreement you can use.