Challenges in Forming an LLC

Jim, Mary, Brett and Paul, neighbors and friends, decided to open a gelato shop, featuring authentic Italian deserts like gelato and tiramisu, along with sub sandwiches that sing of Southern Italy.

Mary, 100% Italian, a second-generation American, had learned the secrets of gelato from her grandparents who hailed from a small city in the heel of their native country. She fiercely protected what she believed was the correct way to make and present what the restaurant was going to serve.

Brett had a strong business background and had plans on how to structure and run this venture.

Jim and Paul, successful contractors, would guide the tenant improvement work to be done to create what they hoped would be an authentic and engaging vibe at the business.

Besides being the keeper of all things Italian, Mary also owned a profitable debt collection business. So, while all four were going to contribute ideas and visions of how this whole enterprise should come together, she was going to provide a significant portion of the funding.

Brett convinced them that the first step in bringing their plans to fruition was to consult with an accountant to determine what form the business should be. That is, corporation, limited liability company, or partnership. After talking with Jorge, an experienced business CPA, they concluded that an LLC was the way to go.

Following Jorge’s recommendation, the four retained me to form and organize this company.

The five of us sat down (thank God we could meet in person – I’m tired of Zoom) to discuss the various components involved in starting a new business.

In my opinion and experience, this combination of skills, backgrounds and funds represented by these four individuals could create a powerful business model, or the egos involved could frustrate and doom the future of this venture.

After going over the preliminaries, I introduced the topic of the LLC’s operating agreement. I explained that this provided the blueprint for many of the essential elements of the business. I explained to them that discussing and resolving the issues involved in the operating agreement could prove a valuable forecast as to the viability of the business.

You see, an operating agreement forces the business partners to address now the inevitable challenges most businesses face at some point in their existence.

These include how much money everyone was going to contribute; how much time each person would devote to the operation; how decisions would be made (and if one or more of the partners had essentially a veto); who would be in charge of what and how extensive their individual authority would be; would one or more of the partners get a greater share of the profits or losses; and how to handle transferability questions.

This last point arises when someone dies, when someone becomes disabled, either permanently or long-term, when one of the owners wants to sell his/her percentage of the company, when there is a divorce (because community property laws can create unanticipated partners), or when a number of other circumstances occur (such as individual bankruptcy, improper behavior inside or outside of the workplace, or if someone simply grows tired of this particular venture).

Working out these issues now can highlight both strengths and weaknesses in this plan. It’s better to find out now if this is going to work or if the hurdles are simply too large to overcome.

In the forthcoming columns, we will delve into these various issues. Hopefully you’ll see why it’s better to prepare a road map now that outlines how to handle these points rather than waiting for a crisis to occur before addressing them. ©

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at cjk@kanowskylaw.com. Nothing contained herein shall be or in intended to be construed as providing legal advice.

Categories: 
Related Posts
  • The Road Map to Opening a Gelato Shop Read More
  • Planning Now Can Avoid Business Headaches Later Read More
  • Five Crucial Commercial Lease Issues, Part 3 Read More
/