Attorney Tanya Simpson’s article in the Florida State University Law Review  entitled “How Restrictions on Dissolution have Crippled the LLC” is a detailed discussion of issues that face all multi-member LLCs.  The article is an in depth look at LLC dissolutions, aka LLC divorces.  She makes several points about multi-member LLCs that are worth reiterating:

  • Many multi-member LLCs do not have an Operating Agreement.
  • Many multi-member LLCs that have Operating Agreements do not have a good well drafted Operating Agreement.
  • Multi-member LLCs need a state of the art comprehensive Operating Agreement.

As an LLC attorney who has drafted 6,700+ Operating Agreements and has seen the nightmares that arise when multi-member LLCs need a company divorce, I recommend that all multi-member LLCs have an Operating Agreement written by an experienced Operating Agreement attorney.

Tanya Simpson says,

With the chaotic state of judicial dissolution provisions and the commensurate uncertainty as to how they will be interpreted, both from state to state and within the same state, a carefully drafted LLC operating agreement appears at present to be an LLC member’s best protection.

The very factors that make the LLC most attractive to small business entrepreneurs – simplicity of organization and flexibility of contract – likely also create an environment that is ripe for problematic  operating agreements. Because many small businesses are composed of family members and close friends, agreements may not always be negotiated at arm’s length. In addition, because of the few required formalities, many LLCs may have unsophisticated or boilerplate operating agreements, or may not have any operating agreement at all. Thus the very nature of the LLC may preclude it from protecting itself against the events of a bad break-up.

The freedom and flexibility to contractually organize the LLC grants members an opportunity to fashion a kind of prenuptial agreement to plan for the challenges of a potential business divorce.  That same freedom and flexibility, however, may lull members into drafting incomplete or unsophisticated operating agreements that, consequentially, will be of little use – or worse – in the  event of dissolution litigation. In the absence of an adequate operating agreement or in the likely event that even sophisticated drafters will not have considered every eventuality, courts will look to the default judicial dissolution provisions in the states’ LLC statutes to fill in the gaps.