Common Mistakes in LLC Operating Agreements

⚠️Avoid using member management in your LLC operating agreement to maintain control over important decisions.

💸Do not include forced distributions in your operating agreement to prevent unnecessary financial obligations.

📝Ensure that the tax provisions in your LLC operating agreement align with the chosen tax election.

🔒Include charging order language to protect your assets from being seized by creditors in case of a lawsuit.

🚫Implement restrictions on transferability to control who can become a member in the LLC.

What is the difference between member-managed and manager-managed LLCs?

—In a member-managed LLC, all members have equal decision-making power. In a manager-managed LLC, there is a designated manager who has control over the operations and decision-making.

Why should I avoid forced distributions in my LLC operating agreement?

—Forced distributions can create unnecessary financial obligations and may conflict with your business and tax strategies. It's best to have discretionary authority over distributions.

How can improper tax provisions in my LLC operating agreement affect me?

—Improper tax provisions can lead to conflicts with the IRS and potentially increase your tax liability. It's important to ensure that your operating agreement aligns with the chosen tax election for your LLC.

What is a charging order?

—A charging order is a legal tool that allows a creditor to place a lien on a debtor's LLC interest, giving them the right to receive distributions from the LLC to satisfy the debtor's debt.

Why is it important to have restrictions on transferability in my LLC operating agreement?

—Restrictions on transferability allow you to control who can become a member in the LLC. This helps maintain the integrity and purpose of the LLC, and prevents unwanted individuals from gaining ownership.

00:10Learn about the common mistakes people make when creating LLC operating agreements.

02:19Avoid using member management to maintain control over important decisions.

02:50Do not include forced distributions to prevent unnecessary financial obligations.

06:07Ensure that the tax provisions in your LLC operating agreement align with the chosen tax election.

06:50Include charging order language to protect your assets from being seized by creditors in case of a lawsuit.

07:55Implement restrictions on transferability to control who can become a member in the LLC.