This is not our first rant about online DIY legal planning. Here are some good reasons why generic legal documents are no good. This post, specifically, is about generic operating agreements for your business. If you own an LLC, you should have an operating agreement for your company.
You can find generic operating agreements online or through cheap legal document producers. Are they a good idea? Probably not. But they sure are cheap! The people posting these documents don’t know you and they don’t know your business. These documents attempt to be a “one-size-fits-all” solution or they are a solution that worked for their own, specific circumstances.
Chances are you don’t believe your business is like every other business, unless you like to be in the commodity business. Even then, you hopefully believe you can provide better service or some other benefit to customers.Your business is a beautiful and unique snowflake (don’t let Tyler Durden tell you otherwise). (Sidenote: Do you wear one-size-fits-all clothing? Or do you buy stuff that fits your body?)
Let’s dissect why pulling something that hasn’t been vetted off of the internet and using it for your business isn’t often a good idea. I came across a generic operating agreement with a terrible provision if you are concerned with protecting your business and profits paid to you. Here is a screenshot of the offending provision:
“Distributions will be made monthly.” Why is that bad? It seems so innocuous. You want to get paid every month, right?
If you or your business has a creditor, they can have a charging order placed against your business. This isn’t necessarily predictable. Maybe you don’t have creditors NOW but that doesn’t mean that you won’t in the future. You could get in a car wreck. You could get sued by a tenant. You could lease expensive equipment to continue to grow your business or practice.
If your business had invested in a custom operating agreement, your attorney could plan for eventualities and leave you some wiggle room in fulfilling your charging order. But if you had used this generic operating agreement, you just made your creditor or whoever gained an interest in your business, very, very happy. They would be sitting pretty.
Why? Because you agreed to distribute profits from the business EVERY MONTH, no matter what. Your creditor would look forward to its monthly paycheck that you obligated yourself to pay. That could strangle the growth of your business by requiring that money go to a creditor every month instead of invested back into your business. By using someone else’s or a generic operating agreement that you don’t fully understand, many other options to withhold payment would be off the table for you. Options that could help your business continue in the face of a creditor.
That said, maybe it’s not worth it for you. Shreya likes to tell…pretty much anyone that will listen…that it’s all about your risk tolerance. Maybe it’s worth the risk for you not to invest in legal services in the short term because you have limited funds and need to focus on getting and retaining customers. That’s okay but as a business owner, you should make decisions knowing the potential risks you face so that you can “level up” in protection as you progress and grow.
Colin Ley is a Seattle asset protection attorney. He is also the co-founder of LayRoots along with his wife, Shreya.