MENDENFREIMANLLP

YOUR FUTURE IS HERE®

5565 glenridge connector ne, suite 850, atlanta, ga 30342 phone: (770) 379-1450 fax: (770) 379-1455

www.mendenfreiman.com

growth, protection and transfer of businesses and estates

A Lesson in Proper LLC Governance Limited Liability Companies are often touted as flexible and easy-to-establish business structures. This reputation makes LLCs an attractive option for many small business owners; however, flexibility does not necessarily translate to low maintenance. A recent 8th Circuit U.S. Court of Appeals decision in Robl Construction, Inc. v. Homoly highlights the risks for LLCs when they fail to keep accurate records and maintain proper LLC governance. (Robl Construction Inc. v. Homoly, No. 13-3607 (8th Cir. April 1, 2015)) When friends and family members go into business together, inevitably there is the temptation to let the business formalities slide. The parties are comfortable with each other and proceed with a relaxed approach because they cannot imagine fighting over the company. But it is exactly this failure to follow business formalities that leads to litigation. What may start out as a friendly business relationship can quickly turn contentious because of a couple of classic errors that business partners make. The lessons outlined below are drawn from the holding in Robl v. Homoly and may help avoid these common mistakes. Understand the LLC governing documents; be involved in the drafting process. When parties decide to establish an LLC, they are afforded a wonderful opportunity to develop a personalized business structure specific to their needs and industry. All too often, however, members do not avail themselves of this opportunity and do not fully understand the terms of the governing documents and how the provisions affect them. Most LLCs create what is called an Operating Agreement, which outlines each member’s ownership interests, the various rights and responsibilities of the parties, and the dissolution terms – among other items. If a dispute arises, courts often look to the terms of the company’s Operating Agreement for clarity. It is hard for members to make the case that they do not understand the agreement or that they disagree with its terms because they presumably agreed to those terms by signing the document. Whether an attorney prepares the governing documents or the members draft the documents on their own, it is during this drafting period that members need to speak up, ask questions and clear any ambiguities. Once the governing documents are drafted and signed, it is then up to the members to abide by the agreed-upon terms and maintain compliance with all state laws.

MENDENFREIMANLLP

YOUR FUTURE IS HERE®

growth, protection and transfer of businesses and estates

A Lesson in Proper LLC Governance - KEP 6.2.15

Amend the LLC governing documents as needed. The importance of understanding and complying with a company’s governing documents brings up another important point: parties can change or amend the business as necessary to better fit their needs and the intent of the owners. Times change, people change, and as a business develops, it may be in the company’s best interest to amend its structure accordingly. It is always easier to make these changes or accommodations when all partners are getting along. Make these amendments in writing, with the same formality as the original governing documents. Operate the business with accuracy and formality.

It is critical for businesses to properly document transactions and maintain accurate records – no matter how small the company or informal the business. Small businesses commonly employ family members, which may make it even more tempting to let some of the formalities slide; but without a detailed historical account of business operations, companies run the risk of parties arguing about dealings in the future. Any perceived time or hassle saved by so-called “gentleman’s agreements” is frequently negated by the resulting time and hassle spent in litigation down the road. E-mail communication can be used in litigation. As business partners work on formalizing business operations, it will benefit the parties to be cautious with e-mail correspondence. E-mail itself is often seen as more casual form of communication; but information contained in these exchanges can be procured and used during litigation should a dispute arise, for example, over the true intent of the parties or their governing documents. Despite these warnings, the LLC continues to be an accommodating business structure that fits the needs of many companies. By treating a business with the respect and formality it deserves, business partners can protect their company and reap the rewards that the LLC structure is created to offer.