Top 6 Mistakes in Drafting LLC Operating Agreements

1. The top mistake that business owners make is having an LLC Operating Agreement drafted and all members/owners failing to sign the LLC Operating Agreement;

2. The second mistake is the LLC Operating Agreement is long and unclear. Keeping an LLC Operating Agreement short and simple is the best way to draft an LLC Operating Agreement. Standardized operating agreements are often times inadequate for an LLC's particular needs and is too long and unclear.

3. The third mistake is failing to maximize the benefits of an LLC Operating Agreement. An LLC is a hybrid between a corporation and LLC. From a tax perspective, an LLC is a disregarded entity, which means that you pay tax based upon your particular individual tax situation. Hence, the LLC does not pay a business tax. Rather, individual members provide their profit and loss on a schedule E, which is attached to their 1040. With an LLC, you can have non-voting and voting shares of stock. This is underutilized and is a great vehicle for asset protection.

4. The fourth mistake is LLC operating agreements must have a easy and simple buy-sell agreement for the Members. Often times, an LLC operating agreement does not clear articulate what the policy is upon a death, incapacity, divorce, or one party wanting to sell the company while the other member wants to continue the business.

5. The fifth mistake is failing to designate how disputes should be resolved. For instance, Member John and Member Jack live in different states or different counties, which county will govern in case of a dispute. Furthermore, the LLC Operating Agreement may require mediation before filing a lawsuit. These are a couple of examples of how to draft a good LLC operating agreement.

6. The top six mistake is failing to include a provision where if one provision is found invalid, this does not invalidate the entire LLC document. Sometimes, one provision can be found invalid and possibly, invalidate the whole LLC document. A provision should be drafted in the LLC operating agreement that if one provision is found invalid, this does make the entire LLC invalid.