The Top 3 Reasons You Absolutely Need an Operating Agreement for an LLC in Louisiana
Without an Operating Agreement, the default rules set forth in the Louisiana Limited Liability Company Act (La. R.S. 12:1301, et seq.) apply. The default rules have severe limitations and may expose the owners to undesirable legal consequences.
A limited liability company is a basic business tool in Louisiana. The primary purpose of a Louisiana LLC is to shield the owner(s) from liabilities associated with business risks. A Louisiana LLC can also be useful for estate planning purposes.
Registering a limited liability with the Secretary of State establishes the entity, but registration alone is like a blunt instrument. Every tool needs to remain sharp, which is why you need an Operating Agreement.
What Is An LLC Operating Agreement?
An Operating Agreement for an LLC in Louisiana is an important document that establishes rules governing internal operations, as well as external relations with the LLC. An Operating Agreement is not a legal requirement in Louisiana, but without an Operating Agreement, the default rules set forth in the Louisiana Limited Liability Company Act (La. R.S. 12:1301, et seq.) apply. The default rules have severe limitations and may expose the owners to undesirable legal consequences.
Reason No. 1: An Operating Agreement for an LLC in Louisiana Can Prevent Voluntary Withdrawal
LLCs are usually established without a term, meaning their existence is perpetual. Without an Operating Agreement, any Member of an LLC can “withdraw” for any reason upon 30 days advance written notice. Upon withdrawal, a member is entitled to be paid the fair market value of their interest as of the date of withdrawal. (La. R.S. 12:1325).
Without an Operating Agreement, every Member has an ace up their sleeve with the potential to destroy the business. Imagine a disagreement among members. One member becomes sufficiently disgruntled and writes down “I withdraw” on a napkin and slides it across the table at a meeting of the Members and Managers. The LLC will then be forced to purchase the Member’s interest for fair market value, the determination of which alone often results in litigation.
Without an Operating Agreement, any Member can hold the Company and other Members hostage by forcing a buyout, which can destroy the business.
An Operating Agreement can override the defaults rules and block the ability of a Member to withdraw or be paid the fair market value of their interest.
Reason No. 2: You Need An Operating Agreement For Enhances Creditor Protection
A limited liability company has many inherent asset protection features. However, there are some of these features are severely limited without an Operating Agreement. Divorce or financial difficulties of a member can put the company and members in a more difficult position without an Operating Agreement.
An Operating Agreement can prevent a creditor or divorcing spouse from accessing financial information about the company. An Operating Agreement can also place a creditor in a difficult negotiating position by leveraging the charging order protection.
Whenever a member is the subject of a liability, an LLC interest can be “charged” with the member’s liability. The extent of this “charge” can be severely limited with an Operating Agreement. For example, an Operating Agreement can give the company and other members the option to purchase any “charged” interest for a discounted value.
An Operating Agreement can also foist “phantom income” on a creditor, which will result in an out-of-pocket tax cost to the creditor. For example, if the LLC has $100.00 of taxable income and a creditor has a charging order over the interest of a member owning 50% of the LLC, then $50.00 of taxable income will be imputed to the creditor with no distribution from the LLC to cover imputed income taxes. This can place a creditor in a difficult position.
Reason No. 3: A Single Member LLC Operating Agreement Can Prevent Dissolution Upon Death of the Owner
A single-member LLC must have at least one member to exist. When the owner of a single-member LLC passes away, the LLC is constructively dissolved and liquidated. If this happens, a court proceeding will be required to either “reinstate” the LLC, or to commence formal liquidation proceedings. This becomes particularly problematic when an LLC owns real estate.
An LLC is like a marriage. Anyone who acquires an interest by gift, inheritance, or otherwise, does not automatically become a Member or have any voting rights or control unless a majority of the existing Members agree to admit the new owner as a “Member.” Any LLC is a partnership of sorts and requires the consent of the other Member(s) to join in commercial matrimony. When the owner of a single Member LLC dies, there are no remaining members to admit the successor. Herein lies the problem.
An easy fix is to simply adopt a single-member LLC Operating Agreement that allows “Permitted Transfers” to family members (for example). An Operating Agreement for a single-member LLC can include a provision that a family member (or any other person) will automatically be admitted as a Member. Permitted Transfers can also be defined to exclude certain classes of individuals, like spouses of Members.
An Operating Agreement for a single-member LLC can avoid many difficulties and a court proceeding upon the death of the single-member.
Can I Create My Own Operating Agreement on Louisiana?
You can absolutely create your own Operating Agreement with GeauxPlans!
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Conclusion
The benefits of an Operating Agreement far outweigh the nominal cost, which includes preventing a member from forcing a buyout, enhanced creditor protection, and avoiding a constructive dissolution upon the death of a member.
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