New Jersey business litigator Jay McDaniel posted an article on his excellent blog called “New Jersey Business Dissolution Journal” that is a must read for every person who owns an interest in a limited liability company or may own an interest in an LLC. Jay’s article explains the five biggest mistakes people make when they form an LLC. The mistakes are the same mistakes I caution people against constantly when I form LLCs and advise the owners of existing LLCs.
Jay McDaniel is a business litigator whose opinions are based on years of experience representing business owners in disputes that arise from the ownership of businesses. Jay wrote:
“Having litigated many of these matters over the years, I see the same mistakes made early in the life of the business surfacing again and again as the source of litigation.”
McDaniel’s point is that the failure to plan when companies are created can be a very expensive blunder when a dispute among owners arises. Even though I am not a litigator (I never personally represent anybody in litigation), my experience as an LLC attorney who has formed 5,800+ LLCs is the same as McDaniel’s.
The list omits the mistake of not having an Operating Agreement. The following is what McDaniel says about the lack of an Operating Agreement:
“If a business does not have one, sooner or later, it will have problems and without any point of reference whatsoever, the probability of litigation is high. When that happens and the business is successful, the chances are that you will spend the price of a college education – at a nice private school – on the lawsuit.
Bottom Line: All multi-member LLCs must have a well-drafted Operating Agreement. Note I said “well-drafted” because a poorly worded Operating Agreement drafted by somebody who lacks LLC experience can be a bigger problem than no Operating Agreement.
Here’s Jay McDaniel’s list of the five biggest LLC formation mistakes (read the article to get the reasoning behind each mistake:
- No operational planning
- No contingency planning
- No valuation planning
- No succession planning
- No planning for amendments to the Operating Agreement.