Legal Considerations in Forming LLCs and Corps; The Importance of Structuring Operating Agreements and Organizational Documents

26 Feb Legal Considerations in Forming LLCs and Corps; The Importance of Structuring Operating Agreements and Organizational Documents

Forming and managing an LLC involves more than just a handshake and shared ambition. Whether you are creating a new Limited Liability Company (LLC), entering into a formal business partnership, or dissolving an existing one, the legal considerations are critical to your venture’s long-term success and stability. 

At JJH Law, we have helped countless business owners navigate the complex legal landscape of LLCs and operating agreements. Below, we will outline key factors every business owner should understand when forming operating agreements or dissolving business partnerships.

The importance of a well-drafted operating agreement

When business allies come together to form an LLC, the operating agreement becomes the foundation of the membership. This legally binding document outlines the business structure, each member’s rights and responsibilities, and the company’s operational procedures. 

Key elements of an operating agreement

• Ownership and Capital Contributions: The agreement should clearly specify each member’s ownership stake and the capital contributions (whether financial, intellectual property, or other assets) each will bring to the business.
• Profit and Loss Distribution: It is essential to define how profits and losses will be allocated among the members. Without a well-defined formula, disputes may arise when the business starts generating revenue.
• Management Structure and Voting Rights: Will the LLC be member-managed or manager-managed? How will decisions be made, and what voting rights will each member have? The answers to these questions should be explicit in the agreement.
• Dispute Resolution: Disputes between business members can arise, and having a defined process for handling disagreements (mediation, arbitration, etc.) will save time, stress, and legal costs down the road.
• Exit Strategy and Buyout Provisions: The agreement should anticipate potential changes in ownership, such as when a member wants to exit the business, the company wants to scale or raise funding, or when a new member wants to join. Clear buyout provisions and exit strategies will mitigate disruption to the business.
• Dissolution Procedures: The agreement should also include procedures for dissolving the business in an orderly manner if the members decide to part ways. This should cover the distribution of remaining assets and handling outstanding debts.

At JJH Law, we specialize in crafting comprehensive operating agreements that are customized to fit the unique needs of each business. This not only ensures compliance with local laws but also establishes clear guidelines that can help prevent disputes down the line.

Dissolving an LLC or corporation

While forming a business or a for-profit company can be exciting, the dissolution of one can be complicated and fraught with legal pitfalls. Dissolution is the process of legally terminating the business entity, and it can be initiated by mutual agreement, a member’s decision to exit, or under circumstances dictated by the operating agreement.

Reasons for dissolution

• Voluntary Dissolution: Partners may choose to dissolve the business by mutual consent, often due to a change in business strategy, retirement, or shifting priorities. This process is typically less contentious if governed by a well-drafted operating agreement.
• Involuntary Dissolution: In some cases, one member may wish to dissolve the company while others may not agree. This could happen due to irreconcilable differences, misconduct, or legal violations by one of the members.
• Judicial Dissolution: In certain cases, the courts may order a dissolution if the business members are unable to continue working together or if the business has become dysfunctional or improperly operated.

Legal steps for dissolving an LLC or corporation

• Review the Operating Agreement: The first step in dissolving an LLC is to review the operating agreement, which should contain the procedures for dissolution. If an agreement is never put in place, state law will govern the dissolution process.
• Filing Articles of Dissolution: To officially dissolve an LLC, the members must file Articles of Dissolution with the state. This document provides formal notice that the business is ending.
• Settling Debts and Obligations: All outstanding liabilities must be settled, including paying off creditors and fulfilling any remaining contractual obligations.
• Distributing Remaining Assets: Once debts are paid, the remaining assets are distributed among the members as outlined in the operating agreement or as required by state law.
• Notifying the IRS and Other Agencies: The IRS and state tax authorities must be notified when the business is dissolved to avoid future tax liabilities. The business must also file a final tax return.
• Handling Intellectual Property and Contracts: Any existing contracts, intellectual property, or licenses owned by the LLC must be properly transferred, sold, or dissolved in accordance with the dissolution terms.

At JJH Law, we understand that dissolving a company can be a complex and emotional process. Our legal team is here to guide you through every step, ensuring that the dissolution is handled fairly and in compliance with state and federal laws.

Avoiding legal pitfalls

Both forming and dissolving a business partnership come with a host of legal challenges, many of which are not immediately obvious to those without experience in business law. Common legal pitfalls include:

• Failure to formalize agreements: Verbal agreements between business members may be unenforceable in court, or at least easy to dispute. Always have written contracts and operating agreements drafted and reviewed by a legal professional.
• Improper handling of liabilities: Dissolving a business without paying off outstanding debts or notifying creditors can result in personal liability for the members.
• Disputes over intellectual property: Intellectual property, such as trademarks or patents, must be addressed in both the operating agreement and dissolution process to avoid disputes over ownership.

At JJH Law, we pride ourselves on helping business owners protect their interests, whether they are forming a new LLC or parting ways with their partners. Our team of experienced business attorneys can help you avoid these common legal mistakes, ensuring that your business remains compliant with the law and that your assets are protected.

Why choose JJH Law?

With years of experience in business law, JJH Law has earned a reputation for providing practical and effective legal solutions for LLC formation, shareholder agreements, and business dissolutions. 

Our clients trust us because we:

• Tailor legal strategies to the specific needs of each business.
• Are proactive in preventing legal disputes before they arise.
• Have a deep understanding of state and federal business laws.
• Offer clear, transparent guidance throughout the entire process.

Whether you are just starting a company, seeking to revise your operating agreement, or facing the difficult task of dissolving an LLC, JJH Law is here to help. Our expert attorneys are ready to protect your rights and navigate the complexities of business law on your behalf.

Contact JJH Law to schedule a consultation and ensure that your business is set up for long-term success or that your dissolution is handled smoothly and legally. Let our experienced team of business law attorneys guide you through the process with confidence.