My LLC Doesn’t Have an Operating Agreement; Can I Sell My Interest?

My LLC Doesn’t Have an Operating Agreement; Can I Sell My Interest?

Business Formation, Limited Liability Company, Operating Agreement
An operating agreement of a limited liability company (LLC) is the company's instruction manual.  Through an operating agreement, the members (i.e., owners) can agree on critical things like their ownership percentage, roles in the company, and other rights and obligations as a member. The no operating agreement problem As a Phoenix Arizona business attorney, I (far too) often come across LLC owners without an operating agreement.  Typically, the company's owners don't really think about it until there's a problem and one or more of the partners wants out.  These members usually want to know if they can sell their interest (either to the other members or even an outsider), given the lack of an operating agreement between the members. Enter the Arizona Limited Liability Company Act Where the members of…
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Dead Wood: 4 Things to Help LLC Owners Avoid Unproductive Members

Contracts, Limited Liability Company, Operating Agreement, Uncategorized
When LLC business owners later decide to take on partner or partners, they can easily lose sight of what can happen if the partnership doesn't live up to expectations. Recently, a situation that came to our Phoenix business law firm illustrates the importance of thinking through the planned partnership and what can go wrong when you don't consider the possibility of the partner to-be under performing expectations (or not performing at all). LLC owner decides to add partners A few years ago, our business owner (we'll call him "A") started LLC (the "Company") to operate her service business.  A built out the business into a highly profitable one and was eventually approached by outsiders B and C to become part owners in the Company.  Partner C owned a successful business…
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So You Want to Invest in Your Friend’s Business (Part Two)

So You Want to Invest in Your Friend’s Business (Part Two)

Business Formation, Contracts, Limited Liability Company, Operating Agreement, Sale of Business
In Part One, I talked about some of the more important questions overlooked (or usually glossed over) by people looking to invest in a friend's existing business. In this part, I'll delve into some of the key documents used to formalize the purchase of an interest in a business, what they are for and why they are important. For purposes of this article, we are going to assume that the business being invested in is formed and operated as a Limited Liability Company (LLC), although the concepts here are applicable to a corporation or partnership, too: Operating Agreement -  As I touched on in Part One, this is a document that hopefully already exists. You should insist upon a complete copy of the version executed by your friend and his…
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So You Want to Invest in Your Friend’s Business (Part One)

So You Want to Invest in Your Friend’s Business (Part One)

Business Formation, Corporations, Limited Liability Company, Operating Agreement, Sale of Business
At least once a week I get contacted by someone who is looking to "invest in a friend's business".  The call or e-mail usually goes something along these lines: "I want to invest in my friend's business" "My friend actually owns X% of the business with other partners" "I will be purchasing [some amount]% of my friend's X%" "It's not a large amount of money, just $[insert dollar amount that is usually a large amount of money to most people]" "I want to be protected" Because this is a question that comes up frequently enough, I figured I would give my faithful readers a freebie and highlight some of the main (but by no means only) issues that come with sinking your money into a friend's company, hopefully helping avoid…
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LLC Operating Agreement should clearly spell out Ownership Interests

LLC Operating Agreement should clearly spell out Ownership Interests

Business Formation, Entity Formation, Limited Liability Company, Operating Agreement
A situation that came to us recently highlights the importance of having ownership percentage interests spelled out clearly in your Arizona limited liability company's Operating Agreement. Jay and Pat: a cautionary tale A person we'll call “Jay” was in business with his partner “Pat”.  The two had met because their kids were in after school activities together.  It turns out Pat had a great product but lacked people skills and was not much of a salesperson.  Jay, on the other hand, loved people and was born to sell.  After sampling the product one day, Jay asked if he could sell the product for Pat and receive a percentage of sales.  Pat thought that this was a great idea, to the point of turning around that very day day and forming an…
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