Risky Do-It-Yourself Documents Part 2: LLC agreement

You can fill out forms to incorporate as an Illinois LLC in about 15 minutes; I literally just finished one 15 minutes ago. The Secretary of State charges $500 in fees, and there are some special requirements for a law office, but otherwise, that’s about it. In conclusion, you may not need a lawyer to fill out the government form for an LLC in Illinois. Now, I can hear you on the other end of my screen, laughing and saying: If that’s true, Colin, then what do I need your services for?

Well, there is also something called an Operating Agreement. And as usual, Do-It-Yourself form providers have given everyone a nice form to fill out that lets you use a simple operating agreement for your LLC. It takes another 15 minutes. And for most single-member companies, this form is “good enough”.

But the question is, what does it do over the life of your business? Put real simply: it dictates every aspect of how your business operates, acquires funding, manages, organizes, hires, markets, make sales, and ultimately, dissolves. Given that it does all this, the real question ought to be: why would you ever want to use a DIY form to govern and legislate your entire operation?

Here’s an example: Sean and Jim are brothers who enjoy pizza. They decide, after saving up some cash, to start a small pizza restaurant together, because they love pizza so much. They are pretty sure it will be a success, but if not, they are sure Robert Irvine will come over to rescue them. They decide to use all the money for capital: flour, tomato paste, sausage, mozzarella, etc.

Then their cousin Samantha, owner of a hair salon, tells them to get an LLC first, because it means they can’t get sued (which is not correct). Upon looking at the form and the $500 fee, both Sean and Jim decide they don’t need a lawyer, because they can barely afford the $500 now that all their money’s tied up.

They read online about LLC operating agreement forms for free, so they decide to fill that out, too. Each brother owns 50%, each contributes 50%, each has 50% of the vote. As Emeril says, Bam! There you have it.

Cutting Pizza

Cutting Pizza (Photo credit: DeaPeaJay)

About 2 weeks after the business opens, Sean gets a call. It’s his ex from exactly nine months ago, who lives in St. Louis, telling him she just gave birth to a baby boy, and it’s his baby. Sean takes off and leaves Jim to handle everything at the pizza place.

A few months later, Sean hasn’t come back, and even though the pizza place is doing great, Jim is upset because he’s doing all the work, and Sean is owed half the income. He calls Sean up and finds out that Sean is back with the girlfriend and buying a home down there to raise the kid together. He asks for his LLC income check to be sent to pay for the down payment. After the call, Jim decides instead to send him his own out-of-pocket money: the same amount Sean paid in capital contributions, so as to buy him out.

A month later, Sean calls Jim up and says “Hey? Where’s the rest of my money? I thought we had a deal!” To make a long story short, both sides can’t agree, and they have to lawyer up to get what they want. End result: the company has to close for good and sell off its entire assets over the next year, with 50% of the proceeds going to each brother.

Why does that happen? Because there was no tiebreaker vote, and neither brother could agree about paying Sean, Jim buying Sean’s share, or anything else. So they were forced to dismantle the whole thing and start over, and probably ended up paying their lawyers every dime they had invested.

In conclusion: don’t trust your lifelong dream of owning your own business to a free DIY document off the Internet; call an attorney to help you instead, and then order some pizza while you plan out your grand opening.

DISCLAIMER: Please do not prepare your own forms after reading this blog, without consulting an attorney first to see if they are appropriate for your situation. I make no representations or guarantees as to the applicability of any forms mentioned here to your specific situation. This blog is ADVERTISING MATERIAL only, and should not be relied upon as legal advice, especially if you are not an Illinois resident. Please contact me if you have a legal question or concern, as no attorney-client agreement will exist between myself and any readers of this blog unless it is signed in writing.

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2 comments

  1. Pingback: DIY documents part 3: real estate LLC | Colin P. Leicht - Attorney at Law


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