Woody Allen once said that 80 percent of life is just showing up. I can’t say that 80 percent of business is what lawyers do, but I can say that whatever portion of your business structure and practice that amounts to “just showing up” can most definitely cause you problems.
One way to eventually find your way to my door is to ignore or neglect the importance of the operating agreement that governs your limited liability company. Most lawyers are, by their very nature, risk adverse – it’s why we are lawyers and not entrepreneurs. Most entrepreneurs I encounter, even if they are not entirely sure of all the reasons why, almost universally understand the importance of creating and maintaining a proper business structure.
One of the steps typically taken when creating the structure for a limited liability company is the drafting and execution of an operating agreement. Given the importance of the operating agreement, as a lawyer I am often baffled by often this document is neglected, or worse, simply ignored.
The operating agreement is a contract between the members of a limited liability company. It is the document “pertaining to the affairs of the limited liability company and the conduct of its business.” See, MCL 450.4102(2)(r).
When questions arise as to the members’ rights and obligations, or when challenges are leveled against those running the company, a court will look at the operating agreement as a primary source of governance. In so doing, the courts will construe the operating agreement as a contract using ordinary contract principles.
For example, ordinary contract principles say that if your operating agreement is clear and unambiguous its construction will be deemed a question of law for the court; the court will give your contract its ordinary and plain meaning. However, if your operating agreement is ambiguous, the court will tell someone like me that factual development – read attorney fees and costs will be spent – to determine the parties’ intent when the operating agreement was formed.
While the courts will strive to give effect to every word, phrase, and clause used in the agreement, and it will seek to avoid an interpretation that renders any part of the contract surplusage. In the end, you will be leaving it up to the court to tell you what you and your business associates intended. That almost always leaves a bitter taste in someone’s mouth.
Given the importance of the operating agreement, it defies logic how often these agreements are little more than boiler-plate forms. A five-minute Google search simply is no substitute for a carefully considered, thoroughly researched and thoughtfully drafted statement of how your business is to run and what the rights and obligations of the members and owners actually are. When a dispute arises, the courts will not take it upon themselves to imply a contract where an express agreement exists, nor will it enforce the contract you wished, in hindsight, had been made.
Given these very real, but entirely avoidable risks, it is incumbent upon the owners and members to think ahead and spend the time necessary to fully document their expectations in a carefully tailored agreement. In other words, spend the time and money at the front end to get it right, or I can almost promise you that you will meet someone like me at the back end.
Disputes are often unavoidable, but many can be anticipated and even dealt with before a lawsuit happens. Think about it; we can help.
Matthew J. Boettcher is a partner in the firm’s Bloomfield Hills office and Co-leader of Plunkett Cooney’s Commercial Litigation Practice Group. He concentrates his practice in the area of commercial litigation with ...
Add a comment
SubscribeRSS Plunkett Cooney LinkedIn Page Plunkett Cooney Twitter Page Plunkett Cooney Facebook Page
- Commercial Liability
- Business Risk Management
- Business Torts
- Commercial Real Estate
- Real Estate
- Civil Litigation
- Real Estate Mortgages
- Commercial Leasing
- Commercial Loans
- Alternative Dispute Resolution (ADR)
- Mortgage Foreclosure
- Shareholder Liability
- Tax Law
- Class Action
- Product Liability
- Fraud Activity
- Risk Management
- Cyber Attack
- Biometric Data
- Banking Law
- Statute of Limitations
- Internet Law
- Non-compete Agreements
- Consumer Protection
- Residential Liability
- Zoning and Planning
- Department of Education (DOE)
- Fair Debt Collection Practices Act
- Fair Credit Reporting Act
- Unfair Competition
- Uniform Commercial Code (UCC)
- Proliferation of Security Cameras, Drones Doesn't Necessarily Reduce Reasonable Expectation of Privacy Under the Law
- Does Sympathy or Empathy Have a Place in the Courtroom?
- No Light Yet at End of COVID-19 Real Estate Tunnel
- When are Clear, Unambiguous Contracts Nonetheless Ambiguous?
- What the Future may Hold for Michigan Real Estate Foreclosures and Evictions
- The Dispute Subject to Arbitration, or is it? Who Decides?
- Illinois Supreme Court Slams Courthouse Door on Non-residents' Product Liability Claims Against Non-resident Defendants for Injuries Suffered Outside State
- Supreme Court Rules Fully Funded Pension Plans Cannot be Sued Under ERISA for Mismanagement
- A Day in Someone Else’s Shoes: Can Mortgagees Challenge Ad Valorem Assessments?
- Landlords may be able to Recover Future Damages Even After Tenants Vacate Leased Premises