Limited liability companies (LLCs) are a popular business structure for many reasons. LLCs protect members from direct liability while simultaneously extending certain tax benefits. An LLC may appear more formal and therefore more professional than a sole proprietorship.
LLCs also allow multiple people to cooperate with one another to develop a business. Some people operate LLCs as the sole member and have direct control over the organization. Others work with multiple other members who act as investors and executives. Members pool their resources and skills to better operate the LLC.
Unfortunately, they may eventually find themselves disagreeing about the organization. Their disputes can have dire implications for the future of the business. How can those starting LLCs reduce the likelihood of a major dispute with other members in the future?
1. By creating a thorough business plan
Many member disagreements stem from differing expectations. One member views the business as a means of generating ongoing revenue indefinitely, while the other members may intend to build the organization and then sell it for lump sum compensation.
There may be disagreements about how the company should expand as it proves successful or how it should adapt if establishing a market share proves challenging. Developing a thorough business plan that talks about five-, 10- and 20-year plans for the organization can prevent members from entering into a business relationship with disparate goals for the organization.
2. By clarifying individual obligations
The members of an LLC may need to have contracts with one another that outline their obligations. Each member theoretically has a fiduciary duty to the organization.
They may also have certain obligations to one another. Clarifying what each member intends to provide and what they should receive in return for their efforts can potentially prevent conflict related to unmet expectations and vastly different contributions to the business.
3. By planning for conflict
Many partnership agreements and contracts between LLC members include provisions for alternative dispute resolution. They may also include terms for one member to buy out the others.
Addressing the possibility of conflict by planning for dispute resolution and allowing for members to exit the organization gracefully can prevent disagreements from damaging the business. Not all conflict is preventable, which makes it beneficial to plan in advance to navigate conflicts with minimal impact on the LLC.
Drafting thorough written documents is a key component of preventing and successfully settling member disputes. Those investing in the creation of an LLC may need help ensuring that the organization they establish can survive disputes among members.