Last Friday Steve Roy, Frank Carroll and I spoke to the Solo and Small Firm Seminar about the new LLC law. It is always good to hear from others in the profession about a subject that has a lot of open questions. Here are some pearls of wisdom from the panel:
1. Read the operating agreement. This gem is from Frank Carroll. He noted that he has run across a lot of lawyers including in-house counsel that will read a particular section of the act, such as the provision that calls for unanimous votes to amend the operating agreement, and assume that it is the new law in the Tall Corn State. Of course readers of this blog should know otherwise. The operating agreement will still control if it speaks to the issue. The statute is the default rule in the absence of words to the contrary in the operating agreement. Which leads me to the second pearl.
2. The default rules stink. Steve Roy delivered this line. And it is so true. Imagine an LLC that shares distributions on a per member basis regardless of the investment by the members, that requires the members to manage the company with each member having one vote on all matters that come before them, and requires unanimous consent to change the "operating agreement" that can be oral, written or implied. I am afraid there might be quite a few out there already and they don't even know it.
3. Read Section 110, read it and understand it. This section explains how the operating agreement interacts with the Act. Understanding section 110 is critical to drafting an operating agreement.
4. Try to get your clients to focus on their fiduciary duties. Because the duties of care and loyalty can be altered and in some cases eliminated, bringing this issue up early with your clients is of critical importance. It is also difficult in practice if you are dealing with neophytes. I've run into cases where the clients' eyes glaze over as you talk about their fiduciary duties and how they should consider addressing them up front. They just want to sign the papers and start making money (hopefully).
5. Clients need to deal with single member LLCs carefully. The casebooks, at least figuratively in this digital world, are full of cases of the veil being pierced when the LLC or corporation is owned by only one person. Dot the i's and cross the t's when organizing them and for God sake keep the money separated between the company and the owner.