Almost anyone can establish an LLC without an attorney. LLCs can be organized by completing and filing a three-page form with the Ohio Secretary of State and paying a $99 filing fee. The form to be filed is comprised of components that are collectively called “articles.”
Upon filing the articles with the Secretary of State, Ohio law gives the LLC and its owners (called members) a short list of basic legal protections, if the members and the LLC follow certain specific procedures in managing the LLC.
However, an LLC can and should include a myriad of additional protections and rules for itself and its members in a document called an “operating agreement.”
There is no requirement that an LLC have an operating agreement. And, operating agreements can be prepared without attorneys. However, operating agreements prepared by Ohio attorneys are almost always better than what a non-attorney can produce and what can be purchased over the internet.
I have found that a good operating agreement should include five main components. First, an operating agreement should include decision-making processes for the members. Are members’ votes based upon how much money was initially invested, or are all members treated equally in decision-making? How many members does it take to sign checks for the LLC or to conduct day-to-day business for the LLC?
Second, operating agreements should explain the transferability of shares, which are called member units in LLCs. Can people sell or give their member units away while they are alive? When a member dies, are the other members able to purchase the deceased member’s member units? Or, are the member units distributed in accordance with the deceased member’s will or trust? Perhaps the deceased member’s interest is expected to automatically be passed to someone else? Clarity on transferability of member units is crucial for LLCs.
Third, operating agreements should almost always require unanimity among members to force members to put more money/capital into the LLC after it is formed. Without a prohibition on additional capital contributions, a majority can sometimes effectively force out members owning minority interests in the LLC.
Fourth, operating agreements should include details on the allocation of profits and losses and labor provided to the LLC. Suppose four members each invest $10,000 in on an LLC, and only one member provides labor for the LLC. How are each year’s profits allocated among the members?
Fifth, the LLC should set forth rules on the ability of members to do business personally with the LLC. When the LLC is initially formed, this is often seen as no big deal. People generally expect each other to be fair. However, as LLCs mature, individual members often engage in business with the LLC. Some of those members will organize “sweetheart” deals for themselves personally to the financial disadvantage of the LLC. These deals are not necessarily illegal, but to make it clear that they are prohibited or allowed, expectations should be clearly set forth in the applicable operating agreement.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.