Resolving LLC Member Disputes

The Limited Liability Company is widely considered the most popular business entity today.  The LLC draws attributes from both traditional corporations and partnerships.  While the LLC is favored among entrepreneurs and business developers for it’s simplicity and freedom from many corporate formalities, good practices must be put in place early on in the business life cycle to prepare for and prevent damaging and costly LLC member disputes later on.

To run a successful business it is important to consistently plan for and anticipate future obstacles.  Business owners experience growing pains that can arise from disagreements with partners, or when bringing in outside investors. In the context of LLCs, LLC member disputes can become complicated and ugly – meaning time consuming and damaging to a company’s growth – so it is important for owners to preemptively consider how they disputes will be addressed and resolved.  The key to resolving LLC member disputes is to create a plan before you need it.

Create a Unique and Comprehensive Operating Agreement

The first and most important step is to develop a unique and comprehensive operating agreement. The operating agreement is the document governing the management and operation of the LLC, much like shareholders agreements or corporate bylaws are to a corporation.  The operating agreement is vital to the creation and growth of the LLC because it clearly outlines how the company will be established and managed, leaving little to no room for ambiguity or unforeseen challenges. The operating agreement is an enforceable contract governing the LLC members and the LLC.

Possible Components to Include in a Comprehensive Operating Agreement:

• Roles of each member of the LLC
• Percentage of member ownership
• Duties and obligations of each member
• Identification of the LLCs managers
• Duties and obligations of managers
• Voting rights of each member
• Distribution of profits and losses
• Decision-making procedures
• Protocol for the addition of new members or removal of existing members
• Meeting procedures
• Protocol for transitioning interest
• Dispute resolution procedures

Develop Effective and Open Communication Practices

Once the operating agreement is completed and executed, it is essential that the LLC members intentionally focus on establishing strong communications practices within your LLC leadership team. LLC members should regularly promote a community of open communication, become comfortable with giving and receiving feedback, and set aside personal emotions, especially when doing business with a long-time friend or family member. The moment there is a disagreement or conflict, determine to resolve it as soon as possible consistently with the terms of the LLC’s operating agreement.

Entrepreneurs looking to form an LLC, and established LLCs that need to better document their business, should contact experienced business attorneys who can guide them in the preparation of a unique and comprehensive operating agreement and other important governing documents.  Engaging the services of experienced business attorneys early in the company’s life cycle will help guard against costly legal issues later on.

Contact The Frazer Firm

For more information regarding protecting your LLC today, contact a trusted attorney at The Frazer Firm.