In Oregon, and most of the rest of the United States, the Limited Liability Company (LLC) is the most popular entity for a new business. The LLC has quickly become the most popular because of the numerous advantages it has over a Corporation, Partnership or a Sole Proprietor. In most instances, a small business will be best served as an LLC.

The controlling document of a Limited Liability Company is call a Operating Agreement. Basically, an operating agreement sets out the rules by which the company will be run. Because of its importance, LLC members should put some time and thought into how they want their company governed. Issues that should be resolved by everyone regardless of the entity they chose are: management of the day to day operations and implementing strategy; allocating profits and losses; transferability of ownership; how they are going to resolve the inevitable member disputes; and, voting rights. In this post, I will cover some of the management issues that can arise. In later posts, I’ll talk about the other issues.

Management issues

It is important to decide how the day to day activities of a company are going to be handled. In the case of an LLC, the members can designate a manager to run the business. Certain limitations should be placed on the manager authority and should require the permission of the members. The manager should not have the authority to dissolve the company, amend the operating agreement or to sell the assets of the company outside of the ordinary course of business. Another limitation that should be placed on the manager is the amount of debt that the manager can accrue without the authorization of the members. If the company is to be managed by the members, similar limitations should be placed on the authority of the members.

Either a member or the manager should be designated to maintain of the bookkeeping and accounts for the company. Whether this is done by the member or by a third party accountant, someone should be responsible for the preparation and generation of tax returns and financial reports. These records should be made available to be inspected by the other members at reasonable times. Designating a member to prepare or to make sure they are prepared will help you make better decisions about the direction of your company and will help resolve member disputes. Beyond being a good business practice, certain sections of the Internal Revenue code and treasury regulations require that a partner be designated.

The operating agreement should also set out the duties and obligations that the members have to the company. Any exemption to any member’s duty of loyalty to the company or the other members must be expressed in the operating agreement. That is, if you want the members to be able to compete against the company, you need to write into the contract. Otherwise, the default provisions of the Oregon LLC Act prohibit such actions.

The company may need to raise more capital to finance an acquisition or an expansion. The operating agreement may obligate the members to make additional capital contributions to the company (“Capital Calls”). Provisions should be put to place to handle the capital calls and the potential failure of one of the members to make the necessary capital contribution. Another source of capital for the company may be from personal loans from the individual members. Some thought should be put into the terms and rates for such a loan.

Those are some of the major issues that anyone going into business should discuss with their potential partners. I’ve found that planning how the business will be run is much easier during the early stages. The longer the company runs, the harder and more expensive it will be to deal with the problems.