What You Need to Know About LLC Operating Agreements (Oh, WOW!)

What’s an LLC operating agreement, and why should every business owner care? In this episode of Learn Laws, hosts James White and Andrew Eastler break it down. Discover how this essential document clarifies ownership, prevents partnership disasters, protects assets, and even ties into estate planning—whether you’re a sole member or multi-member LLC. From real-world examples (yes, even Google uses LLCs!) to expert tips on avoiding legal pitfalls, this episode is a must-listen for entrepreneurs. Tune in to learn why you need one before you start operations—and why “DIY” might cost you more in the long run.

Disclaimer: This is for educational purposes only, not legal advice. Consult an attorney for personalized guidance. Subscribe for more business law insights!

Transcript

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Welcome to Learn Laws. Welcome to Learn laws. My name is James White and we're here with Andrew Eastler. And today we're going to be talking about LLC operating agreements. Right. So what exactly Andrew is an LLC operating agreement and who needs one? Okay, let's start with what is an LLC before we get into the nitty gritty of the operating agreement? An LLC is a limited liability company. What that really means is it's a hybrid between a partnership and a corporation. The corporation gives you a great deal of asset protection because it creates this new corporate entity that will shield you from some kind of liability as long as you don't break the rules too much. Okay. And the other benefit of a partnership, which is a lot of flexibility, adaptability on how you govern and operate the business. So it's a newer hybrid that's very popular because it doesn't have the same level of high standard for corporate compliance. You don't have to keep up with the minute book as aggressively as you do a corporation. Perfect. So NLC is usually used for smaller businesses that are starting up that don't need to raise money. Correct. So if I'm raising money, then unless I want members, it's more advantageous to, obviously most people that raise a lot of money do like an incorporation or some sort of other business entity. Are LLCs more towards geared towards smaller businesses? Well, actually that's an interesting point you make because there's quite a few of the largest companies in the world that have converted from corporations to LLCs, including Google out of Delaware. Oh, wow. That's very, very interesting. So why would somebody need an operating agreement? So I form an LLC, I assume that it's done at the Secretary of State. Once I have my articles of organization, I'm good to go. So a lot of individuals that I speak with, a lot of other entrepreneurs, I ask them this question, just preparing for the show, do you have an operating agreement? And if so, how did you structure it? And I would say five out of 10 people, 50% said they've never had an operating agreement before and they didn't even know what it was. So I was very shocked, and that's where I came up with the idea for this show is let's explain what they are and why they're so important and actually why you should always have one. Even though they're not required, you're not required to have one. It's important to have one. So for example, in the state of Florida, to start your LLC, all you need to do is file an articles of organization with the Secretary of State and you're off to the races. The problem is that's just going to give you the skeletal framework. You're just giving them the name, your principal address, your mailing address, who your registered agent is, and then who's authorized to bind the company. Right. Perfect. That's it. So the public knows now that there's this business that's out there that exists, but as to the internal operations, what's going on? How do your muscles move? Metaphorically speaking, right? That's where the operating agreement comes into. Play. So I think that's where the biggest confusion comes in from somebody that is starting an LLC is because they go on a Secretary of State's website and they say, oh, I can file, I think Florida, it's like 200 bucks or 140 bucks or something like that. It's not super expensive. So they go online and they don't realize that they need an operating agreement. They don't realize why they should hire an attorney. So when you hire an attorney to help you, not only do they form the LLC properly according to your wishes and your future goals and medium and short-term goals as well, but they also help you prepare the operating agreement business plan essentially when you start, it's like a miniature business plan. And that's the way I've always looked at operating agreements since I've started learning more about them and understand them a lot more. I feel like they're like the miniature business plan before you create the real business plan. And I'm glad you brought that up because even people that have done that and then come to the attorney afterwards, you may find out that you chose the wrong entity type. Right? It's not right for everybody, the LLC, but also corporations are not right for everybody. Correct. I've had people come to me, Hey, I just formed this new corporation, here's what I want to do. Why did you choose corporation? Oh, well, I thought that was what it was. I came from Canada where that's the most common. That's a perfect example. That's what happened to me, right? When I first moved to Florida, I was forming inks all day long and I didn't realize the actual benefits of an LLC because I didn't have that legal knowledge. That's why we're doing this show is because there's so many people out there that either want to start a business or already have a business and they just don't know. They don't know the different types of corporate structures that exist, which one's right for them. So I think a lot of people become very intimidated And that's why they don't do an LLC operating agreement because they do the first part and then they say, well, I'm so intimidated because I don't know what needs to be in there. I don't know if it's legal, if it's not legal. And this is why it's important to obviously consult an legal advice, but it's also why you need an LLC operating agreement because this helps you think through these things. So if you're asking questions like, Hey, is this legal? Can I do this? Can I do that? Well, when you start thinking about an operating agreement when using an attorney, then you'll get answers to the questions, but you'll be able to improve on that corporate structure. Correct. Right, a hundred percent. Because the attorney's going to ask you questions and bring up things you probably never even thought about. Yep. You do that all the time with me when I ask you questions, so, so the entrepreneur's job is to see all the good things that are going to happen in the future. You got to have sunshine and rainbows to believe in the business enough to put money in it, correct? Correct. But when you come to an attorney, our job as a business attorney or as business structuring attorney, is to think about strategy, think about the worst possible case scenarios, and then talk to you about, Hey, how do you want to handle that scenario? Should it happen in the future? And of course you're going to say, well, that's never going to happen. I'm never going to have a business partner that's going to be starting to embezzle funds from me or not do this or do that. Yes, it happens. All the time. It happens all the time. Right. It's really crazy how the world has changed so much. And I think the other reason why people get confused about LLC operating agreements is because it's not required. If I'm correct, you can correct me if I'm wrong, it's not required to be filed with the state. Correct. Yeah. In. Florida specifically, but other states might have different requirements. I'm just talking about my experience in Florida. So when you file your articles organization, if you're doing it yourself, for instance, or you're hiring attorney, the attorney would obviously know this, but if you're doing it yourself, you don't know that you need an operating agreement, you might not even know that an operating agreement even exists because there's no requirement to upload it. There's nothing there. So I think a lot of people get confused. So it's not required to be filed with the state, but you should have one anyways. And this is something you probably don't want anybody in the public seeing, right? Because this is really just a contract between yourself. If you're a sole member of an LLC or yourself and your members, the other people that have started this business with you, how do you govern that relationship? And that would be a multi-member LLC, right? So you'd have a single member, or if you. A sole member, LLC is what we often use as a term, a. Multi-member, LC. And a multi-member. LLC. So when somebody has business partners or a certain type of ownership structure, that would be classified as a multi-member LLC. Okay, perfect. Okay. I just wanted to clarify that. So if you don't have an operating agreement and you start this business and you've got other members that are a part of it and you have a dispute, then the dispute is governed by your state statute. You guys don't get to choose how to interpret that proof or you agree that you have already verbally agreed in the past, which is sometimes difficult to prove. And if there's a dispute, that's usually because somebody misremembers or you remember how things were supposed to happen. Correct. They have their own truth, right? Yes. Right. That's why we reduce things to writing as attorneys. Yes. So you understand everybody's on the same page, and if there are disagreements and arguments, then you can either the partners themselves or if involved, educate each partner or educate each other on what they actually agreed to. Right? That's one of the really important parts of when you're starting your business, go to an attorney after you've had a little bit of a conversation with people that you want to start the business with. Just feel 'em out first. How do we want to run this business? Who's going to be in charge? How much money are we going to take out? Do you need a salary? Do you not need a salary? How much money are we going to be putting in? How much am I going to be putting in? How much are you going to be putting in? Are your connections going to be able to be leveraged because I know that you have these connections with other people, or are you just going to say, no, I'm not going to leverage those connections and now I what that relationship's going to be or the value that you're going to provide to this business? Correct. So I think the most important aspects of an operating agreement is actually defines or clarifies ownership structure and ownership contributions. So it defines ownership and then the contributions of the people in the LLC because there's member managers, which is the owner manager, and then there's just members that own a portion of that LLC or a membership interest in that LLC. Am I correct? Yeah. Yeah. And by default, if you don't have an operating agreement, then the state has to guess as to what your intentions were, and that's not good. You never. Want to let the state guess what your intentions are. Right. So we just presume, for example, that if you start a business with me and we both go on the articles of organization as authorized members, that is 50 50, but we could have had a verbal agreement that it was going to be 95 5 because you were going to put in a hundred thousand dollars in equity, and I'm just going to be out there using my name. And that's what an operating agreement resolves those kind of ownership issues that could potentially turn into disputes later on. Correct. Right. Okay, perfect. Okay. Awesome. Yeah, I mean that's one of the great benefits, but I mean there's a plethora of other benefits. So I want to get into one of them right now, which is holding your ownership structure. We talked about apportioning equity, but also let's say you're married, right? Husband and wife, and you guys start a business together. If you have an operating agreement in 26 out of 50 states, you can hold that interest as tenants by the entirety. Have you ever heard of that term? No. No. Go ahead and explain that for me. So tenants by the entirety, this is a vestige from the Victorian era, And it's also part of our Christian roots where basically a man would marry a woman and she would cease to be a separate legal entity and suffrage people and feminists, please don't freak out. We've obviously gone through suffrage and women's have gotten a lot more rights, but the idea is that the husband and the wife both contribute to this particular structure together, and then it becomes a marital asset. And now the marriage itself is what owns this particular asset that makes, and you can basically hold your LLC membership interest as John and Jane as a husband and wife or as tenants by the entirety. Oh. Wow. And with that, you get a great deal of benefit. Number one, you get a right of survivorship. Between. The interests. So if one of them were to pass away, the other would automatically succeed to the interest and avoid. Probate. That's incredible. Number two, the better thing is asset protection. So if Jane gets into a car accident and gets a judgment against her, and that creditor comes out looking for what she owns to try and take things, if all she ever owns is stuff that's owned by the marriage, they're probably not going to be able to go after it. Wow. So I guess that's why from a real estate developing perspective, why I put my properties into an LLC, because if somebody sues you, they can get a charging order against you essentially, but they can't technically or theoretically take that asset. So whether or not they're granted a charging order also depends on whether you're a sole member or a multi-member LLC. Okay, got you. Right. Okay. So a sole member is pretty easy for a creditor to just go in and start taking assets because they're just going to treat that entity as a disregarded entity when they're coming from the backside. From the. Reverse coming you personally as the member and going after what you own. Okay, that makes. Sense now, but if you own that with me and I'm the other member, I'm going to say hands off, right? That's not fair to me. I don't owe you anything buddy. Right. Sense to that creditor. So you can't come and take the underlying asset. From my expectation, I have an investment backed expectation that money and that asset and that real estate, whatever it is that they're trying to take, is going to be out there working for me. That's very interesting. So that's why that one aspect, and it's just incredible how one legal concept can change the whole outcome of somebody's small business. I mean, it's truly incredible. And the other interesting thing is, right, if you're listening to this podcast I'm talking about Florida, Florida recognizes that as a legal concept and they say it wouldn't be fair to this other member, but some other states don't. So just keep an eye. That's another important aspect of knowing why just talk to an attorney. You don't want to be, oh yeah, I listened to this podcast and I'm in Alabama and I'm going to trust all this information this guy's telling me and I'm just going to go out and do it myself. Yeah, don't do it yourself. One of the biggest pieces and the most important pieces of business advice I give everybody that I speak with or I consult with is always hire an attorney. I've never understood why. Look, I think I do understand why to a certain degree, but I've never understood why if you're going to start a business, you're going to do stuff yourself, especially when it comes to a legal perspective. Look, if you're your own attorney, I get why you're doing your own LLC because the rules, you're educated, you've gone to school for x, x, x years, so you should know what you're doing. But a lot of people that start, they just don't want to pay the money to hire an attorney to do it. Right. I think that it's the biggest mistake that anybody can make whenever, again, whether it's an operating agreement, a business contract service contract, whatever the case is, you can put your ideas down on paper, but always make sure it's reviewed by the attorney. And there's a lot of benefits to that, and we'll get into that with the LLC operating agreement later with malpractice insurance. But that's something that I have to reiterate because a lot of people just don't understand why you should hire an attorney for an LLC formation and specifically why you should always hire an and not one of these online, do-it-yourself websites for this particular reason, whether it's asset protection, whether it's ownership structures, whether it's verifying that who owns what. I mean, there's so many important details that go into an operating agreement that it bedazzle me that people just don't understand why they need an attorney. I mean, there's a lot of really important pain points that end up happening after you start a business with a buddy and let's say it's losing money, what does your operating agreement say about whether that other person should be putting more money in or whether you should be putting more money in? So there's no actual, there's no rules if you don't have an initial capital commitment where you and your buddy have agreed in writing on how much more to move on, how do you resolve that dispute? So question for you, how would you resolve, in theory, how would you resolve a dispute where somebody didn't have an operating agreement, they each put in $10,000 as a startup, and then they need more money and one partner wants to put money in because they believe in the business, and the other partner is a little nervous, just wants to go get a job and be done with it. How would that dispute generally play out in Florida? Well, there's on paper, and then what happens in reality? Okay, so on paper, you would have to go to litigation. If you have a dispute with your business partner and the business partner wants to do one thing and you want to do a different thing, you can have a vote on the issue. And if you don't agree, if you're 50 50, then you have a stalemate. Right? Correct. And so if you're stuck in this business now and you want to be out, then you have to maybe partition your interest, which is a whole course of litigation. It's very expensive and costly, and you have to get permission from the court to sever your interest. Oh, wow. So that's another episode. We could talk for 8, 10, 20 hours on that side of. It. Absolutely. So that's on paper how it would work if you could never come to some kind of solution in practice. Often once people realize that's really the only other risk solution, at that point, they begrudgingly agree to something that maybe they wouldn't have had. They had an operating agreement that defined those roles and responsibilities, selling. Their interest back to the other partner or just becoming. Or you could hold them accountable. Let's say, Hey, I commit to starting this business. We need 20,000 to start, but we know we're going to probably need another a hundred thousand. Maybe we're going to buy some brand new equipment. And we know that's on the horizon. So we say, Hey, listen, if we end up needing that money because our initial capital contribution has not made us enough money to buy that a hundred thousand dollars piece of equipment, we both agree that we're going to put an additional $50,000 if we have to. That's interesting. So an LLC operating agreement, it proves the business structure, meaning the ownership structure who's like the member manager, who's. How they hold that membership interest, how they hold. That. Tenant by the entirety. That makes a lot of sense. And then it also in practice and in theory, I guess by having all that in writing, it would prevent a lot of partnership disasters like you were talking about, where there's contribution disputes, there's roles and responsibility disputes that could just not only destroy friendships and partnerships, but destroy businesses too and what they were intended to accomplish. Right. Yeah. I mean, this is why you want to sort it out right here in the beginning. And if you guys can't agree on this now, you don't want to be 500 grand into this thing and operating a business and maybe you really believe in it and then all of a sudden realize that the other side had a completely different apprehension about. What the relationship was supposed to be. This happens, and this happens all the time, even when I'm hired as a business consultant, to go in there and help build people's businesses or help them start a business. This happens a lot more than people realize. And there's so much money lost, and there's so many friendships and goodwill lost that have taken 20 years to build, and then it just blows up in everybody's face. So that's why I think an LC operating room is always important to do sooner than later because it not only proves that it's separate from you in the ownership structure, it is sort of like a small business plan and allows us for custom rules. So you can do almost whatever you want as long as it falls within the legal framework of that specific state. And it also prevents partnership dispute, which I think is super important. That's why I mentioned it again, because I think that's super important because if you have partnership disputes, you're not going to be able to have a good business. Well, I mean there's always going to be a dispute down the road. Everybody has their own ideas about how they want to run things and what's the best for things. It's important. Number one, I think just as a general mantra that you and I like to utilize is stay in your lane, But you have to identify where those lanes are from the outset. Hey, I'm really good at finance. You're really good at the legal aspect. You're really good at sales. I'm really good at marketing. You define those kinds of roles and that helps kind of resolve who's supposed to be making those kinds of decisions. Oh, I'm the marketing guy, so I'm going to approve every direct mail piece that's going to go out. And then maybe you're the finance guy and you're going to say, okay, well you want to spend $50,000 on this direct mail campaign. You can approve the design, but I'm going to only approve $25,000 for this campaign to make sure it's going to work for. Us. Okay, that makes a lot of sense. So question for you. If you don't have, and I know with an incorporation because you have so many corporate responsibilities that it's called the corporate veil. So can you explain to me the question I'm going to have, and I'll ask you it now, is if you don't have an LLC operating agreement, can the court system pierce the corporate veil in the event of a partnership dispute or some other dispute, whether it's with an outside creditor or a partner? And again, if you don't have an lc operating agreement. Okay, yeah, that's a great question. So when the court is looking at piercing the corporate veil, and that's whether it's a corporation, an LLC partnership, that kind of limited partnership or limited liability partnership, they have a variety of factors that they start looking at. One of those factors is whether you've kept up with corporate compliance. So that's the entire minute book that you do with corporations. That level of corporate compliance that you have to keep up with is much higher of a standard than with an LC. Correct. And that's why LLCs are very popular with small business. And just go back a little bit, what is the corporate veil? Because I think many people that are listening to the show, maybe they don't know what the corporate veil is. So when I say piercing the corporate veil, what does that actually mean in theory? Very quickly. So the whole point of starting a new separate business legal liability for the operations of the business. So if you want to start up a lemonade stand, but you don't want to potentially be liable if it loses money or some kind of accident negligence cause some kind of damage to somebody else, then you create this new entity and you let everybody know, Hey, when you're buying this lemonade, you're buying it from A, B, CLLC. You're not buying it from Andrew Eastler or James White. Perfect. Okay. So when we say Pearson, the corporate veil, that means that they can basically say you are also part of this too personally on a personal level. So let's go back to that lemonade stand. Let's say I knew that I was using rotten lemons to make those. Lemonades. And I didn't put any money into the LLC to protect it. I didn't buy any insurance for the lemonade stand for the business. You have no operating agreement. I have no operating agreement. I've not filed my annual reports, I haven't done my minute books. These are all, I'm commingling my funds with the lemonade stand. I went out and bought my own car with it, my personal. Vehicle. It's a business expense, right? And buying groceries with it in addition to just lemons, I'm buying all the other stuff for my own personal use, vacations. Everything else. Yeah, soccer. Practice. So commingling is one of those other factors. So if I'm basically treating, this is the standard, if I'm treating the business as an alter ego of myself, pretty much just for the purpose of trying to separate the liability for sketchy things, if I'm frauding people or I'm telling people it's lemonade when it's really not, or I'm using rotten fruit and I know that it should be, it's not fresh or capable for human consumption, then the court's just going to say, well, obviously this is just a front. Of course. And it's not fair to the victims of my terrible lemonade to have them have no recourse because I didn't put any money in. For them to recover from the. Damages makes a lot or anything else. Explain that. That makes a lot of sense. Right, I guess so the must haves for an LLC operating agreement define ownership structures, basically paid contributions, future contributions, percentages of ownership, et cetera. That would be the management of it. What about profit and losses? Because I'm thinking, okay, so if I own 50 50 me and you own 50 50 of an LLC. And. The LLC makes X amount of money and you're just the member, meaning that you're just like a passive type investor and you believe in me and I'm the member manager, manager member, can I decide who gets those profits? So if we have a hundred thousand dollars net profit, can I pay myself a bonus without you approving that? I guess that would be a rule in the operating agreement. So the operating agreement also outlines profits and losses and expenses and who gets what. Correct. Can you kind of elaborate on that a little bit for me just so I understand better? Yeah, yeah, absolutely. So when you have an LLC and you have let's say, two or three members, who decides what to retain and what to reinvest and how much is coming back to you personally? Well, it's supposed to be something that you guys agree on, and if you have no operating agreement, then it goes back to revised limited liability Company Act in the state of Florida, for example, and it goes based off of those voting rules. So typically that's majority. Rules. Perfect. And that was going to be my next question, which is a good transition is voting. So for instance, in some LLCs that I have, I have many because I'm a small business person, I have several small businesses, I have somewhere people in 50 50, it's a 50 50 partnership, but I have more voting interests or if there's a tie, maybe correct, I'm the. Tiebreaker. Correct. That's something that you could put into your operating agreement. The operator of the business, I have more knowledge on how that business operates, therefore I should be able to make the decision. But I also want my business partner to have 50% equity, but I make the decisions ultimately if it's a tie, if we don't agree. And what kind of decisions you can make and when you can make them and which stuff requires a vote, which one doesn't. That's all stuff you can put into the operating agreement. It also gives you the option as an LLC to be a member managed LLC versus a manager managed LLC. Ah, okay. Perfect. Can you explain what those two mean? Yeah. A member managed LLC is one that's basically governed by the members. Typically, each member has equal authority on day-to-day operations of the business. So let's say you're operating a restaurant and you want to find a new food vendor. So you go out and you sign a contract with Cisco to give you more food and a member manage, any of the members could have signed that contract. Wow. They're legally authorized to make that kind of decision as long as it's in the ordinary course of business. Wow. That's a very important detail because again, if you have that structure and you don't know what your partner is doing and they start committing the business to all these crazy things and you're over here saying, oh my God, oh my God, what are you doing? So that's probably thinking about it now, that's probably not a good thing to have two or more, unless you super close and you have really well-defined roles and responsibilities that can be in that operating agreement. Well, I mean, first and foremost, I start sometimes with business consults and the person comes up and is like, I'm looking to start a business, but I want to make sure my operating agreement's on point because I don't trust my partner at that point. The question is, if you don't trust them, well at this point at the outset, why are you going to be starting a business with them? Correct. This is like a marriage, of course. You're basically becoming wed to your other. Member. And if you are having trust issues at this point, maybe you need to rethink the business. And what happens if you have trust issues at the beginning, what happens when money's involved? Because that's generally when problems arise, when there's a lot of money involved and somebody thinks they're getting less or more or whatever the case is and they start doing funny things. Okay. So let me recap. So the solid operating agreement is going to have an ownership structure. It's going to define the contributions or the management structure of it, like manager member managed or just a member, right? Yeah. I mean, you could have one manager for a manager manage. You could have two managers for two manager manage, and then you got to have an idea of how to break that kind of tie if there's a problem or voting. Okay, perfect. So then we have the voting, so it defines who gets the votes, who doesn't get the votes, who has the voting power and all that fun stuff, how votes are held, how they recorded meetings, et cetera. And then the other thing, which I think is the most personally me, this may not be for everybody else, but for me, it's about what happens when somebody dies. So estate planning or planning for succession or something like that. So can you briefly explain how exit rules, how it can set people up for success when it comes to either selling the business, buying another business, death of a business partner, and so forth? So by default, if somebody dies without an operating agreement, their interest has to go through probate. Oh, wow. Okay. So that's not a fun situation. If case, you have never done it, especially in the state of Florida, most estate planning attorneys are probate attorneys charge 3% of the value of the estate if conduct you have probate. So if you have a house that's say $300,000, I mean, that's a lot of money and it can take years before that interest is resolved. Meanwhile, somebody's got to operate the business. Correct. And so this is where not having an operating agreement can cause a lot of disruptions, not only to the business, but you can also cause a lot of disruptions for your errors who you think are supposed to be getting this asset because by the time they get, the asset may not be around, but it's also very expensive because if your business is worth $10 million, that's lot of money. But it's all based off of the $10 million valuation is based off of what net revenue you're having. That's crazy. And how much revenue drop are you going to have if somebody passes away who's a leader, right? That's nuts. So you want to avoid vague terms. So the key takeaway here, I'm getting as a, have an operating agreement from the onset at the very beginning, preferably the day you incorporate the company and really plan that or maybe a week after, how does that work? When would you need the operating agreement? You want to start that operating agreement before you start operations, right? That's the whole point. You're agreeing on how the operations are supposed to be conducted. Of course. You can go out and file for an articles organization, but you should not start operating and utilizing any of the capital that you're putting into the business unless you have an agreement in place on how to deal with it, how to operate the internal governance of the business. So would do, so I said do it the day of incorporation, right? Because you're not really operating the day of, maybe you are, right? Maybe you start right away. So would you have it signed prior to the official articles of organization being approved by the state and issued, or would you do it the day of or after or does it really matter? As long as you have an attorney drafting the operating agreement, it doesn't matter. Oh, really? Right. Okay, perfect. And the operating agreement can say, Hey, the articles of organization are going to be filed or going to be effective on such and such date. That's why you get the effective date when you file for. Okay, that makes a lot of sense. Now. Yeah, I don't want to give people the wrong impression of filing, not an attorney, right? I'm just a person with real world experience that goes all the time and I'm learning every day. So you would generally have the operating agreement decided upon, and most of the terms agreed upon, you'd have it created and then you would form your company or kind of do it simultaneously? Yeah, we don't want to put the cart before the horse. The important thing is that we're not going out there and committing the business to anything or committing yourself to anything all of the specific terms. Perfect. Because then that will complicate creating an operating. Agreement. If you've done a bunch of stuff before you have, you don't want to be spending $200,000 on piece of equipment. Makes sense. And you're expecting the other side to put in another $200,000, but they're saying, oh, I only want to commit to 50. Okay, that makes sense. Yeah, because I get that question a lot is if they don't have an operating agreement, how can I get one done and how do we resolve past actions of the members? Because some people have really good relationships they never have any problems and they resolve their disputes. There's lots of business partners out there that do that, and then there is a dispute or something happens, maybe they pass away and the air comes in and says, why did you do this? Why did you do that? This wasn't right. This didn't follow the state rules. And then now that partner that they had a symbiotic relationship, it was all going. Good. Handshake deals. Handshake deals, and all of a sudden they're dealing with a crazy ex-wife or a crazy stepchild or something like that. It just ruins not only experience, but the business and that friendship or that those people have. Yeah, that's not to say that obviously people that come into the business as an heir can't be a good business partner, But the problem is, if you don't have the terms of your membership agreement reduced to writing, then that new person that comes in is going to look at the situation on the basis of what the default is, which is the statute. And so they're going to come in and say, okay, well, there's no operating agreement, which means if dad and his business partner were on Sunbiz or a secretary of State website as members together, there's 50 50. Meanwhile, you and your business partner had made a deal that it was going to be 90 10, and now there's a dispute. And what, oh my gosh, you've gotten 40% more profit over the last four years. My dad had no idea that you were stealing this 40% profit over this stuff, even though it wasn't really him stealing. It was that was the arrangement. Was handshake. And now this person has to try and prove in court, for example, that wasn't the. Arrangement. And that's hard to do without writing, especially if you do handshake type deals. Right. And the other witness is now no longer available. So I guess no veg terms speak with an attorney and your business partner if it's just you figure out what you want to accomplish in your goals and maybe have a consultation and figure it out from there by answering questions and getting some answers back. Now my next question about an operating agreement. So okay, we have an operating agreement, we're good to go. We have all of our terms and conditions and everything ironed out. We're signed it. Do you have to update an operating agreement? I would assume based on my experience, you should update it or look at it occasionally and say, Hey, we need to update this and change this. So how often well should you update it? Yes. I think the answer I think we could say is yes. Right? Yeah. I want to give you an example. Okay, go In December, there was a court case that came out of Arizona, and just so everyone else is aware, limited liability companies, they use pretty much a standardized act across the United States. If there's a state that says, I want to start doing LLCs, they will pretty much copy what the other states have done. And it's December 20, 24, 20 24. Perfect. December of 2024. Perfect. This case came out. And what it said basically was, if you have a silent partner in an LLC, their creditors in a bankruptcy can come and stand in their shoes and essentially take their shares just like they would take the shares of Apple in their investment portfolio. Oh, wow. Okay. And that is something that US business attorneys have probably never seen before, even expected that decision to come into play. Right. Wow. So that is something that now people like me are amending operating agreements for all the time because we want to make sure that our clients understand either partner in an LLC or whether they really don't want to be a silent partner anymore and want to be materially active and have a material obligation to the business, and therefore their creditors can't come in and step in their shoes and take away their membership. Interests. Probably, there's probably many people that just did a DIY operating agreement, have never had any issues, they don't really understand or know. And then there's the people that have had them prepared by attorneys or somebody else maybe, and they're not up to date in the most current, so they're actually exposing themselves to more liability. So I guess the key takeaway for this would be how often would you review the operating agreement once a year? Do you think that's fair? Once every six months? I mean, obviously you should know your operating agreement. If you have one, you should study it, research it, and fully understand it. But. I'm a small business guy. I'm going to be realistic. Once I get it done, I just start making money, and I think most people are like me. So for me, would it be like what would you suggest? Every six months, every year? Yeah. So let's talk about that for a second. So when we start the operating agreement, the idea is that we think about the possible problem would ever occur in the future and put them into paper. And then what happens is we put it into a book and then forget about it, and it collects dust until that dispute starts. Correct. And then you. Open it up and you're rearing, oh my God, oh my God, I'm so glad we planned for this. Or Wow, I can't believe we didn't put this in the operating agreement on what we should do in this scenario, right? Yes. So definitely you should have an attorney review your operating agreement at least every couple of years to make sure you're keeping up with the changes in either the statutes or case law as they continue to reinterpret how things are supposed. To work. And also your business operations, they So you may bring on another member and the other member may leave or there might be a death or. Right. Just last week I was reviewing an operating agreement another attorney draft it, and I asked them about a specific provision and they said, no, we thought it meant the opposite. And they had basically got their attorney to draft this provision that was completely the opposite of what they wanted. And that's why it's so important to fully understand and ask an attorney questions on what this means and how it works related to your business. So if I have a business, I'm going to ask you, okay, I see this provision here, the transfer on death provision or whatever we want to call it, and what does this actually mean? So if I die, it goes here, but what happens after I die? And so if you have questions, continue to ask questions to make sure you fully understand what that term means. Because sometimes we get, because we're experienced in business and we've done a lot of different projects together, or we kind of assume, and I think that's the biggest problem is people assuming. So me personally, what I do or what I think I'm going to start doing is when I file my annual return once a year, I'm just going to give it a quick read at my annual meeting if I have partners and just give a quick read and say, does this represent our current operating procedures? Is this what we want? Have you changed? Here's an example. I have two partners and one partner just updated their estate plan. They got into a fight with their child and they updated their estate plan and didn't want that membership interest going to that one specific child. And so we were just talking and this came up, this is a real thing. This came up and all of a sudden they said, oh, I don't want my child to get this membership interest. And I said, well, in our operating agreement it says that your child gets this membership interest. So in that aspect, when I came to you and we had this discussion, does the operating agreement supersede an estate planning that if I have a friend that changed the ownership and said, Hey, I don't want my daughter to get this, but in the operating agreement it says that the daughter, this child, that the son gets this what prevails? Yeah, great question. So as long as the operating agreement is clear and it specifically identifies an individual who is then in existence, they haven't passed away. Previously. And is able to take that interest, then the operating agreement is going to control because it's under contract law, just like a life insurance policy. So that's why it's so important to always review your operating agreement, or if you have a small business yourself and you don't have an operating agreement, that could potentially be a backup for an estate plan that gone wrong. Correct? Yeah. I mean, everybody that I create an LLC for, I always try and get them to name individual beneficiaries or their trust. For example. That's very smart. In the operating agreement to avoid probate because again, even if you have a will in place, it is not going to avoid probate. Necessarily. Wow. So an operating agreement can not only prevent disputes, it can outline roles and responsibilities, contributions who has voting power, and then also it can help with estate planning specifically maybe avoiding probate if done correctly. And it also provides an element of asset protection, especially when we're talking about earlier it was well tenants by the entireties. Yeah. Tenants by the entirety is a relationship that husband and wife can hold the interest together and that's going to help protect them from certain creditors that come after them individually. And then another benefit is multi-member LLCs. In the state of Florida, we have protection against charging orders under the underlying assets of the LLC if you're a multi-member LLC. Oh, wow. And then of course the operating agreement can also indemnify managers and officers of the business. There can be a variety of different things that we can add into the operating. And this is why I think it's so important to actually hire a professional to to help you create and write and edit your operating agreement. Because I feel like using templates myself before, even though I think they were, I dunno, a couple hundred, and then I ended up hiring, before I met you, I hired an attorney and it was like a thousand bucks or something. I think it was 800 bucks, maybe a thousand. And I was so appreciative of that time because for the extra $500 or 600, whatever it costs, you're getting so much more value and you actually have somebody to fall back on. So if you do have a question later on, say a year after making your operating agreement and maybe you're not clear, you don't understand, or maybe you forgot, you can call that person up and say, Hey, what does this actually mean? Whereas if you DIY it, you're like, I think this is what it means, but I really don't know and I'm not an attorney and I don't have a lot of legal experience. Maybe I have a landscaping company or a construction company, and I'm just trusting that everything's going to be okay, even though it's not. And then all of a sudden when things happen, you're trying to fix or resolve a mess that is very difficult to resolve. So you actually spend more money long term trying to resolve issues by having an incomplete or incompatible operating agreement for what your business purpose or use is. Yeah, I mean that was a great explanation and I just want to emphasize just like people encourage you to ask questions of your doctor, ask questions of your attorney, we held a degree called the Juris doctor in Latin. That means the teacher of laws. Our job is to teach you, our job is to obviously do what's in your best interest, but most of the time that's in business. That's having you guys understand what you're signing. I'm not doing you any favors by having you sign a piece of paper that you don't understand. Correct. And that's the goal. And I think that's what creates a really successful lawyer or an attorney. And when we met about 15 years ago and you decided to become an attorney because we had interesting experiences, right? That's something that was a big priority for us. We wanted to do it right. Yeah. I mean, of course there's a full spectrum on that. You don't want to be the person that thinks they know better than the lawyer. Of course, of course. But you also want to make sure that you really understand what you're getting yourself into. And if you don't feel confident, you're not liking the answers that you're getting from your attorney, ask somebody else. Get a second opinion. It's always okay to get a second opinion. And maybe I have some friends that have medium sized businesses and they have multiple attorneys, and what they do is they get two or three of their attorneys on the phone and they have little conference call and they all hash it out and decide what position to follow or what to do. Now for an operating agreement, I think you don't need a whole team of attorneys to review it unless you have a serious estate plan or you have a large asset or something where you really want to be sure. So I think one attorney for an operating agreement's probably sufficient. As long as they're a business attorney. Correct. Yeah. So I think that that is probably very reasonable. And I would assume, obviously we're in 2025, the beginning of 2025, we're definitely having some economic challenges here. So based on my experience doing some price setting, I'm looking at a personalized attorney prepared operating agreement, I would assume under a thousand bucks or probably around that range. But it can be up or more, just depending on the attorney. If you're in South Florida might be much more than say northern Florida where they're a small town. There's like one or two attorneys that are more reasonable, right? Yeah, absolutely. So Miami is a totally different market in the state of Florida. For anybody that's not from. Florida, we don't talk about Miami very often. It's a very interesting city when it comes to legal. And it is, it's a whole different world, like a. Separate state really. A lot of those practitioners don't like coming up. We don't like going down. Yes, it's kind of a old little, there you go, people got the secret of Florida. But in all seriousness, less than a thousand bucks is very common for an LLC operating agreement. Of course there's going to be a spectrum. If you're asking for a million custom provisions. It might be more, I'm just talking like for a small business, the basics where you have some q and a with an attorney, you have a consultation, you have the back and forth, the explanations and so forth. I think that's probably a reasonable price to expect to pay. But again, it could be more like, again, in my personal experience, dealing with some French, just talking to them and just talking to'em about business succession and stuff like that. I mean, their operating agreements are very comprehensive because they have major assets, they have major corporate structures, they have different ownership types as part of their larger estate plan. So again, you can ask an attorney up front, I guess if you're nervous, I think a lot of people get nervous that an operating agreement is going to cost them a lot of money, even though it's not as much as people think they're going to pay. Just obviously talk to your attorney, say, Hey, how much is your operating agreement? Is it flat fee? Do you charge hourly? And if you charge flat fee, is there going to be an additional charge later on if I need to make changes and so forth. So just be open with your attorney and say, Hey, this is my personal advice by the way, for anybody listing, talk to your attorney. Be open with that attorney and just ask them for a price quote. And again, if you're the royal family and you have all these crazy corporate structures, you could get into thousands of dollars. But for the average person, I think budgeting around a thousand bucks or maybe less would probably be sufficient for them to get a properly done operating agreement. Compared. Yeah. And when you're calling around, let's say you're calling an attorney, of course price should not be your number one deciding. On that. Realistic, look at the reviews, look at maybe get referrals, that kind of stuff. Of course. But if you're asking, you should be able to call up and say, Hey, what's the range of. Costs here? Like that? They're usually not going to want to pin. Most attorneys and law firms don't want to pinpoint an actual amount in case you come in with a million complicated provisions you want to add in there. But they can say, usually give you a range. And if they're not willing to give you a range, it's a little bit of a concern. Either they don't normally do it very often or it's something that they charge a lot for. So what I do when I work with an attorney, I'm thinking about doing something, is I will book a consultation. I'll speak with that attorney to kind of make sure we're a good match, make sure we have a good energy, good connection. Because if you don't feel comfortable with whether it's a doctor, attorney, or anybody a vendor, I mean, you're not going to have a great relationship if you don't feel open and comfortable. So I generally, whether it's an attorney, an accountant, CPA, I'll pay for consultation. I will try and explain what I'm trying to accomplish and then I'll ask for pricing afterwards so they have a better idea of what we're doing. And everybody has the same expectations because nobody likes a surprise bill. A hundred percent. I'm a small business owner too. I'm in this space, but I still don't like surprise bills. I mean, if my client is surprised, then I have not done my job. Of course, communication, your job is, my job is to set expectations and do what's in the best interest of my. Clients. Yes. Perfect. So if it was my choice, I'd obviously hire an attorney to do an operating agreement. I would not do it yourself or use online templates because as you discussed earlier in December 24 with the new case precedent and where was it out of again? Arizona. Arizona. Arizona. Yeah. A form or a template online that A is not personalized to the person that has the LLC. If rules change over time, that LLC operating agreement may be null and void or there may be complications later on when you're trying to enforce certain provisions. Right? Absolutely. That makes less sense. Or when one of your members goes. Broke and it's private. So basically you have the cupcake, which is your LLC, you put whatever sprinkles and decorations you want on top, that's your operating agreement. And you don't have to file it publicly with anybody, obviously, because private. Right. Would you ever suggest giving a copy of the agreement to your children or maybe a banker or something, especially if it succession planning or some sort of asset protection planning, if you pass away where it goes to just so everybody's on the same page, or would you keep it quiet and just personal? And then if something happens, then they can present that operating agreement. So at the very minimum, you want to have your attorney have a copy of your operating agreement. Of course that makes sense. And then you keep your own copy. Okay, perfect. You can keep it with your estate plan as long as you have the right provisions in there, it is going to be part of your estate. Plan. That's very. Okay. So whoever you name to be your personal representative, as we call them in the state of Florida, most people know them as executors or execut tricks. You can let them know or where it's going to be found. You can put it in a save, whatever it is and say, Hey, if I pass away, go here. So that's another good strategy. For that. So we have the operating agreement done. Now, question, I've always wondered this actually personally. So if I have an operating agreement and it's private, how do I prove that I actually have the operating agreement at the time that I actually said I had it and not some random place? So I get in trouble and I don't have an operating agreement and I just quickly make one and sign it. How do they prove that I didn't have it to begin with? Does that make sense? So for me, when I do an operating agreement, I always make sure I e-sign it because I like the time and date stamp because nobody can ever say, I didn't do it at that specific date and time or notarize it like what I do, and I know this, I don't think this is. Required. No. But what I like to do, because extra special, if I have partners, I actually get it notarized. I go sign it, I make sure everybody's aware of it, and I get it all notarized. So if there's any issues later on, I have a time and dates or a timestamp or date stamp, and then I have a verified signature. So nobody can dispute the fact that they didn't sign it or it wasn't done at a specific date and time. So definitely electronic signatures using something like Adobe sign or E-sign, that kind of stuff, that's going to have what's called, what we call legally attribution, which is going to be those time and date and where it was IP addresses, those kinds of things to track it and prove the time. Now, of course, any contract could be subject to forgery, fraud or anything else. So it's going to be based off of the individual circumstances of that case. Of course. So it's easier if you have attribution, for example, or a notary stamp to prove that. But it doesn't necessarily mean that if you don't have those things, that you're not going to be able to prove that the contract was in existence at that particular. Time. And I'm always a little extra. Even the resolutions I do, I get everything notarized. I think for me it's a good habit. So again, that's just in my personal prerogative, right? It's not required, but I like to do it anyways. So I just have that attribution on my paperwork. You've got that trust, but verify. Attitude. Yes, trust, but verify. So I think that's pretty much it for an operating agreement. Is there any other thing you could maybe tips or tricks you can give somebody that is thinking about reviewing their current operating agreement or they don't have one, they want to establish one? Actually, wait, my next question that I have now that I said that was, okay, so I have a business. I've started a business, I've been operating it for months, years, whatever, never had an operating agreement. It's just me that owns it, I manage it, whatever. I am a landscaper. I don't really see the need for it. I've never had to have a need for it. How do you deal with, as an attorney, if somebody comes in and speaks with you about that, how do you deal with the prior actions? Would you just do a clause in there that says all prior actions are blah, blah, blah, blah, blah, if it's just them? Does that make sense? Okay. So we've got a sole member, LLC that's been operating for let's say 60 years on its own, no operating agreement. Correct. Just articles of organizations have been filed. Correct. If they have a bank account, they would've had to do usually a resolution to open the bank account. So I'd want to see where that is. And we want to have a minute book put together. We want, generally you want to have annual meetings, so you want to have minutes for that, but it's not required under the statute. So really you just start from scratch with an operating agreement, make sure that you're addressing all of the needs of that person. In particular, for a sole member, LLCI would focus a lot on the succession planning aspect of it. Correct? Right. Are you married? Do you want it to go to your spouse? Who do you want it to go to? Do you already have an existing estate plan? Do you have a trust? And what's going to happen to this business once you pass away? Wow. Yeah. So if somebody six years from now comes back and says, I've never had an operating agreement. I need one done now for whatever reason, I'm just thinking about my estate planning. I'm thinking about expanding my business and the SBA wants a copy of it or whatever, you could do one at that time and then retroactively work your way backwards for any major decisions and then take care of those decisions at the same time. Well, I mean, I'm not sure what kind of major decisions you would be referring to. If you're a sole member, then you pretty much have full discretion to sign contracts, obligate the business. I. Think. It's probably going to be a little more concerning when you have another member, if you're not a sole member LLC, and you start out there and you have multi-member LLCs and you've done a whole bunch of stuff in the past, that's where we got to go back and say, okay, we did X, Y, and Z, we and Z. We should have had a vote on, for example. Correct. That's what I was, we didn't, yeah, that's the whole point I was trying to make is if you, so say if you have two people in an LC And they've never done an operating room, they just never knew, or they just didn't feel the need for it at the time, and they come back to you or they come to you, for instance, and say, Hey, we have a company in LLC, we've made all these decisions. How would an attorney handle that? Or how would that situation be handled if they didn't have an operating agreement, they were partners and they come to you like five years later or something like that and want to do an operating agreement for whatever reason. How would you handle all those decisions that were made from the time of organization, the time that seen you? Well, we want to look at any of the major decisions that were made outside of the ordinary course of business. And without knowing more about their business, we wouldn't really know what's in the course of the ordinary course of business and is. But those things that are outside of the ordinary course of business, we want to make sure that we crystallize those decisions. So. That both members can write on a piece of paper that they were okay with the decision that it wasn't done just by one of the members on their own going. Rogue. And suddenly binding the company and then potentially breaching their fiduciary duty. So we want to crystallize, identify all of those decisions that were outside of the court, ordinary course of business, and make sure that they're acknowledged either directly in the operating agreement or by a separate resolution. The other thing you want to do is when you're reviewing that operating agreement, is to make sure that they haven't done too many things that have started ticking the boxes on piercing of the corporate veil analysis that we talked about. Earlier. Yes. And that's another show that we're going to have I think later on. I think that's a really interesting topic that almost 95% of small business people have no idea about, and they don't understand how catastrophic that could be if you don't manage your business. So yeah, we can get into another, that's another show that's going to be a good show, actually. I think that's going to be a fun show. So to wrap things up here, I think the key takeaways for me are always hire an attorney prior to forming your articles or filing the articles of organization. Yeah, you'd be surprised how many people have come to me for a consultation and said, I want to form this corporation and I want to do this, this, and this. And by the time they walk out, they've got a completely different plan or they're not going to form the business at all. Wow. Because they realize that there's, wow. I mean, that's cool. So okay, hire an attorney. Obviously, do not do it yourself. I don't recommend it personally. Always start with an operating agreement, so don't wait. So try and have that operating agreement done before you start. Any operations, before you start. Any operations. And then once you have that operating agreement done, make sure you review it. Like I would say every year, personally, I do mine every year. I just quickly read it so I understand it. I mean, I understand all my operating agreements if I have one, but I like to review it every year on my annual return date. That way it reminds me to do it. And. Then make sure it addresses estate planning and succession planning and voting rights and contributions, and who gets what, because there could be 50%, 50 50, but the profits and losses may also be like 60 40. So each person may own 50 50, but then one person, the manager, may get more of a distribution than the other one because they're managing the business. And that's what that operating agreement will outline. Correct? Yeah. Yeah. So compensation, distribution, whether you get a salary, whether you don't get a salary, how much a rata share of the profits and losses you get, voting rights, all of those crazy things. Even if you verbally agree on it, you really want it and you need it reduced to writing. Perfect. Well. We're done for the show today. Thank you very much. Hey, thanks for listening to us. I hope it was as fun as it was for me, as it was for you. Yes. And make sure, again, if you have any questions, obviously we're not providing legal advice. All this is for educational purposes only. If you have any suggestions for us to improve what we're doing, that'd be great. Comment below, make sure you've not put any, what do they call that? Privileged and confidential information. Yeah, privileged and confidential information, because it will not, that is not protected by any means, and it's accessible for everybody. So make sure you keep it general and generic. And again, if you need personalized legal advice, always contact an attorney. There's a lot of good ones out there that do want to help you. And again, don't be afraid to ask them questions. Right. Yeah. Okay. Perfect. Well, that wraps up for episode number two. We're going Awesome. Thanks everybody. Have a good one. Bye.