LLC Operating Agreement Strength

11 Replies

I just purchased an LLC from Inc Authority. The guy is now trying to get me to pay for an operating agreement. I was planning on just finding some basic one online sine I don’t plan to have anyone else on this LLC ever. He insisted an operating agreement online would not hold up and would not provide me the full legal protection of an LLC (quite generic). Somehow his operating agreement signed by a lawyer is stronger than one signed by myself and notarized, is this true? He is also trying to get me to pay extra for “membership certificates” saying I have no way to legally validate that I own this LLC without them which sounds like completely bogus since my name is registered to the LLC. I’m not sure how a certificate adds any validity or proof of ownership. Since I’m the only one ever planning on being in the LLC I se no need for membership certificates. Do I need this certificate to prove ownership of the LLC, and do they provide any protection for my personal assets? My only two goals for the LLC are to open a business bank account, and to protect my personal assets from any type of lawsuit that might occur.

I am not a lawyer whatsoever, so please don't take my advise as any formal legal guidance. But I am very familiar with the workings of an LLC.

If you want the LLC to be recognized as a true legal entity, then you must have formal articles of incorporation and share certificates; you're better off paying a lawyer to set this up correctly than notarizing something off the internet. Why? Well, your state government can audit your documents anytime. You also can not apply for a business account and/or loans without proof of incorporation, which includes the articles, as well as obtaining your EIN from the federal and state government. That being said, if you are spending more than a thousand dollars in legal fees to set this up, you may want to shop around, as this type of LLC is very basic and not expensive to establish. Good luck.

@Matthew Karmazyn

You don't need an operating agreement for a sole proprietorship LLC in order to do business, but getting one may be a good idea anyways. The articles of organization will list membership status, so I do not see the need for getting any kind of certificate. Of course, this should be ran by an attorney as they will be able to give you the best advice for you situation.

Thanks @Michael S. and @Bob Okenwa for your input.

The total for everything is right around $400 which isn't that bad I suppose. I may be able to save a few bucks going with someone else, but at this point I don't think it will matter so much. You have a fair point, it's a small dollar amount for the piece of mind of everything being set up properly as well.

Registering a company is really easy and you can do it yourself or use any of the registered agent services that will charge you a small fee for it.

However the operating agreements, that would be signed by the members, are the most important piece of internal documents, especially for asset protection. The boiler plate ones that are provided by online services are very generic and are not optimized for the goal of your LLC. I you create an LLC for asset protection, you will need asset protection oriented operating agreement. If you want an LLC for a partnership in a real estate purchase, you will need an operating agreement optimized for that goal, etc...

That is why it is highly recommended to have a lawyer specialized in your field of operation to draft this operating agreement for you. Even if this document is not recorded nor published, that will be this document that will be your first line of defense or point of failure in court.

Now if you have multiple LLC having the same function, you can pay once for the first LLC and reuse the same operating agreement for the others.

In the same token, you can find some companies that are selling operating agreement templates that are focused on a specific goal. That may be cheaper than a full lawyer draft customized one.

You can also collect multiple sample operating agreements from other investors here at BP, and pick and choose the article that make sense to you and draft your own one. But that is risky if you don't know what you are doing as you may miss some big items. Also, you won't get any specific advice from non lawyers as it would be illegal to do so.

For me, I am more a DIY type and I have bought some specialized templates. I am also collecting operating agreements drafted by different lawyers from other members to attempt to compare them and try to understand the differences and see if I am missing something important in mine. For my core main asset protection holding LLC, I had my operating agreement reviewed by a lawyer.

@Mike S. makes several good points above.  

One item of caution - using articles from other investors on here runs the risk of your articles including terms that are not legal in your state of incorporation. What is legal to include in the articles for an LLC in Texas may be an illegal structure or arrangement in New York, for example. Be very careful doing this unless you're using articles from another LLC formed in your state.

@Matthew Karmazyn

For a single member LLC, you might be able to get by using an operating agreement that you find online. The problem is that you can also find some absurd ones online. I've run across a few during my days that were so bad it actually made me laugh out loud.

I would say don't waste money on "membership certificates" but that again depends on what the operating agreement says. Some operating agreements actually say that they need certificates to prove ownership (an example of a terrible one). 

Note that asset protection is more complicated than forming an LLC. In fact, the amount of asset protection you get from a single member LLC is way less than people think. It's helpful but it's a small part of your asset protection plan. That said, most people do not need any serious asset protection schemes.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Setting up articles of incorporation and an LLC should be easy to do online without a lawyer. I do it all the time for new LLC clients through my bookkeeping services. You should have the articles and a stock certificate with your ein numbers done also. But paying 400 is about right for this service just make sure you do your homework and read everything before you sign and if it feels greasy then it is.

Originally posted by @Michael S. :

What is legal to include in the articles for an LLC in Texas may be an illegal structure or arrangement in New York, for example. Be very careful doing this unless you're using articles from another LLC formed in your state.

 Excellent point I forgot to mention.

@Matthew Karmazyn ,

I dont think you need member certificate. 

Also, if you dont have an detailed article of incorporation, the state law takes over so most you will be entitled to basic asset protection.

For SMLLC, you really dont need an operating agreement that over-rights the state statutes, so as of right now you should be fine with just registering for LLC and filling out the online article of incorporation.

I’d just like to throw in that the way you keep records and run the company AFTER formation is just as important, if not more so, that the formation documents.

The whole point is to illustrate through documentation that you and the company are separate entities under the law. So, the more you can segregate funds, maintain annual records, and generally respect the distinction between you and your company, the better chance you have of protecting your personal assets in the event of a lawsuit.

Many people set up the company and then never document anything else. This opens you up to a claim that the LLC is a sham, even if you filed perfect formation documents.

Just wanted to throw that in, since it is sort of the “Achilles Heel” of LLC protection.

(I’m an attorney, but not your attorney.)

@Matthew Karmazyn

Just a quick thought as an agent, investor, and soon to be lender -- 

Not sure about your local area, but 2 hours down the Susquehanna we have some offers that require for the full entity docs to be presented with the offer. Mostly it is REOs. I have received feedback in the past that my forms looked too generic while the other party had a very good "LLC documents package". Don't know if it is worth the $$$, but figured I would mention it.