Last week a referral called me. “Samantha” explained that she was an investor and real estate agent. She did a wholesale deal to help out a friend several years back. The property was valued at $250k, and she made a modest fee. Nearly 2 years after the sale, the “friend” filed a lawsuit against her for $450,000 claiming the square footage of the home was incorrect. Samantha explained, “It’s been 2 years since they filed the lawsuit, I’ve spent over $100k in legal fees, and my lawyer said we have at least 1 year to go.”
Samantha formed her own LLC, did not have the correct pieces in place, and of course the attorney sued her LLC, and sued her personally as the owner of the LLC. She explained that when she was just getting started, she wasn’t sure if the real estate was going to be a money maker, so she just formed her own LLC and saved several hundred dollars. Fast forward several years and she’s now making about $300k per year and has become the “deep pockets.” She didn’t have any of the documentation required and is now realizing the importance of proper paperwork.
Anytime you are forming an LLC, there are pieces you need to have to be in compliance with State and Federal Laws.
Generally, you file the Articles of Organization declaring your intent to operate as a Corporate Entity. Once the articles are filed with the Secretary of State, you adopt the Operating Agreement, which we’ll cover in more detail, issue Membership Certificates, usually issued in percentage of ownership, and organize these documents in a Corporate Record Book. These documents represent the legal embodiment of the LLC and should be complete and up to date to ensure your Corporate Veil is intact.
What is the Operating Agreement and why do you need this? The main purpose of the Operating Agreement is to lay out the “rules of the game.” Thomson Reuters, a legal resource wrote, “Starting a new small business can be an exciting — and intimidating — endeavor, and it is vital to set the stage correctly. For many small business owners, that means forming an LLC and creating an operating agreement to avoid personal liability, legal burdens, and financial obligations.”
Double check to make sure you have the proper pieces in place. We don’t want you in a position where a lawsuit comes up and your corporate veil is trash. There are all kinds of free resources online. As with anything, you get what you pay for… Too often, new business owners & investors will find the “FREE Operating Agreements” online or even from the Secretary of State’s Office. These documents are usually written extremely poorly and might leave you with personal liability when you need it the most.
