As a lawyer who litigates disputes among partners, close corporation shareholders, and limited liability company members and managers, I hear a lot of myths about them. The myths below are in italics, with my (sometimes snide) comments below each one.
I will be an owner, so of course, I will be employed by the Limited Liability Company.
Unless you have a strong employment agreement for a term of years (or until you die or retire) or employment is guaranteed in the Operating Agreement, there is nothing inherent in being a Member/Owner of an LLC that guarantees employment.
An LLC Operating Agreement is a standard document that can be found on the internet.
That Operating Agreement that you found on the internet is worth every penny that you paid for it. It may be even worth less than nothing. An Operating Agreement that the parties do not understand and that is not specifically tailored to meet the needs and expectations of the members may have unintended consequences. The provisions might work in your favor, but they might just as well work against you.
We hired a lawyer to set up the company, so she will look out for my interests.
Not necessarily. It is understandable to want to save costs when setting up a company and to jointly hire a lawyer to draft the Operating Agreement or By-Laws. But that cost-savings comes with a price. The lawyer cannot advocate for any one of the founders. The minority owners are in particular need of protection, but the lawyer cannot advocate for the minority because she owes a duty to all the founders. In a perfect world, everyone gets their own lawyer, but of course, this rarely happens. If you are the minority owner or you are joining an existing company, at least consider having an independent lawyer review the Operating Agreement and suggest changes to protect you and your expectations in the company.
We are equal owners, so we must get paid the same salary and have equal say.
Nope. The people running the business (President, CEO or Managers) will decide the compensation. You could argue that the compensation is unreasonable, but you will have to prove it and you may have to file suit to do anything about it.
As for equal say, usually, the officers, managers or board of directors have all the say. If you are not one of those, your opinion may count for very little.
At least my business partners won’t withhold dividends or engage in self-dealing.
But what if they do? You need to guard against this as much as possible. When it does happen, you have a few options: (1) a legal battle; (2) sell your interest to the majority at a discount; (3) go away with your tail between your legs.
My business partners and I trust each other, so that’s enough.
Ha! That one made me laugh.
Of course, you might be right that your business partners are good and decent people. But even those rare birds will have legitimate disagreements. Documenting your expectations can help avoid this.
Also, think about what happens if your reasonable business partner dies and her crazy husband Larry inherits her ownership interest. A buy-sell agreement with life insurance can address this, but it also shows why you need a strong operating agreement or shareholder agreement.
If I need to liquidate or if I can’t work with my partners, I can just sell my shares.
Maybe you can in theory if there are no restrictions on transferability. But if the environment is toxic, no one will want to buy your interest. You need an exit strategy going in. You need to foresee potential disputes and guard against them.
If my business partners try to screw me over, I’ll just call the LLC Police.
Okay, I made that one up. The point is that no one is going to assist you in a private business dispute other than a lawyer that you hire on your dime. You can’t expect the Attorney General or Secretary of State to get involved unless there is a public interest.
If you have a clear case of embezzlement, maybe you can get law enforcement interested. But these situations are usually not clear-cut and law enforcement sees them as civil matters.
My own father/son/mother/brother/sister won’t turn against me.
Maybe not your family member, but I’ve seen all of these unsavory situations in family businesses.
At least I can’t be personally liable for corporate obligations or wrongs that I or the LLC commit.
This is partially true part of the time, but now always. Clear? Here’s the thing, if you properly follow corporate procedures and record keeping, you may avoid contracts that you did not personally guaranty and wrongs that you were not involved in. The reality is that the owners of most small businesses are involved in all actions and decisions. Creditors, banks, landlords and others may insist that you personally guaranty company obligations. So personal liability can be hard to avoid unless you are a larger, more established business.
As always, the above is not legal advice.
By Adam P. Whitney, Esq.
617.338.7000
CONNECT WITH ADAM
RELATED PRACTICE AREAS
ADAM’S RECENT POSTS
Critical Do’s and Don’ts for Executives Considering Quitting or Facing Termination Part 2
In Part One of this blog, we discussed the essential do's for executives and professionals navigating the end of an employment relationship. From reviewing your employment documents and consulting an attorney to gathering evidence and negotiating terms of departure,...
Critical Do’s and Don’ts for Executives Considering Quitting or Facing Termination Part 1
Whether you're considering quitting or facing termination, navigating the end of an employment relationship can be a complex and emotionally charged process. As an executive or professional, you have a lot to lose, so it's crucial to approach this transition...
Baby, It’s Cold Outside: Protecting Your Rights in LLC and Close Corporation Freeze-Outs in Massachusetts
Just like the bracing chill of a Massachusetts winter, experiencing a corporate freeze-out can feel cold and harsh. Whether you're part of a Limited Liability Company (LLC), partnership or a close corporation in Massachusetts, a thorough understanding of freeze-out...
A Business Breakup: How to Navigate a Toxic Business Partnership and Safeguard your Financial and Mental Health
Your business partnership started with a shared vision and enthusiasm, much like a marriage. But as many business owners know, partnerships can sour, making your daily operations a nightmare. If you find yourself as a minority owner or majority shareholder in an...
The Ties That Bind (and Unravel): The Perils of Mixing Business with Family
Sometimes bloodlines blur business lines. There's a potent blend of emotion and finance in family businesses. I've been in the trenches, witnessing brothers at odds with brothers, sons challenging fathers, and sibling rivalries taken to the extreme. A wise judge once...
GET IN TOUCH
Law Office of Adam P. Whitney
265 Franklin Street, Suite 1702Boston, MA 02110
ABOUT THE FIRM
PRACTICE AREAS
Business Litigation and Employment Law
Outside General Counsel
Shareholder / LLC / Partnership Disputes
ATTORNEYS
Adam Whitney
RESOURCES
Testimonials
Clients
Success Stories
DISCLAIMER
No attorney-client relationship is established by your use of this site. You must not send or share any confidential information about you or any legal issue without Attorney Whitney's express written permission. The content of this website may be considered advertising for legal services under the laws and rules of professional conduct. The content does not constitute legal advice. The content is for information purposes only. Legal advice cannot be provided unless you hire my firm and we perform a full review of the legal matter and the most current, applicable law. The law in your state may be different than Massachusetts, so the information in the content may be completely irrelevant if you are outside of Massachusetts.