Indiana Limited Liability Companies and Fiduciary Duties

Reading Chancery Gives Victory to "Freedom of Contract" and Refuses to "Find" Fiduciary Duties in LLC Agreement When Not Clearly Stated from Delaware Corporate and Commericial Litigation Blog gave me a reason to tout Indiana as a place for forming a limited liability company. The Delaware Chancery Court decided that Delaware law imposes no fidicuiary duty other than what is specifiied in the LLC's operating agreement.

Importantly, the court found no provision in the LLC Agreement at issue that: "create[d] a code of conduct for all members; on the contrary, most of those sections expressly claim to limit or waive liability."

Here is the money quote:

"There is no basis in the language of the LLC Agreement for Segal's contention that all members were bound by a code of conduct, but, even if there were, this Court could not enforce such a code because there is no limit whatsoever to its applicability".

The "implied covenant of good faith and fair dealing" claim was carefully examined and dispatched with one of the more lucid and cogent treatments I can recall of this amorphous cause of action.

Finally, the breach of fiduciary duty claim was confronted by first reciting the provisions of the Delaware LLC Act at Section 18-1101(c) that allow for complete elimination of all fiduciary duties as part of an LLC Agreement. The court read the parties' LLC Agreement in this case to eliminate fiduciary duties because it flatly stated that:

"...members have no duties other than those expressly articulated in the Agreement. Because the Agreement does not expressly articulate fiduciary obligations, they are eliminated."

Indiana's Court of Appeals decided in Purcell v. Southern Hills Investments, LLC (pdf format) that an implied fiduciary duty existed for Indiana LLC's. The Court of Appeals relied upon Credentials Plus LLC v. Calderone, 230 F. Supp.2d 890 (N.D. Ind. 2002) (see Purcell at page 9 -10).

The Delaware blog finds no problem with this situation while I have serious qualms. My qualms fall into two categories. First, having been involved in cases where the mistreatment of an LLC's minority members amounted to a breach of fiduciary duty and with an implied fiduciary duty there was no protection for the minority. Secondly, I see too many people relying on do-it-yourself sites to create their operating agreements and those can lead them into the first category.

All of which means one thing for the non-lawyer: get a lawyer to draft or review your LLC agreement.

LLC Uniform laws

Not too often do I write about theory rather than practice, but reading A model for LLC laws (Thanks to Delaware Corporate and Commercial Litigation Blog for its Ribstein on LLCs that lead me to Professor Ribstein's article).

I do not know that our General Assembly has given any thought to revising our LLC statute. If there is any movement in Indiana towards changing the LLC statute, I say reading Professor's Ribstein's article should come first.

Do Corporate Governance Procedures Apply to Indiana Limited Liability Companies?

Not a question that has come up in Indiana but has in Delaware. See LLC Not Subject to Corporate Governance Standards of Corporations.

From the description of Delaware law given in this post, I do not think there is any great difference with Indiana law. Which is why I when I have written here about limited liability companies I have emphasized the importance of the operating agreement.

If you are trying to start a LLC in Indiana, I am taking on new clients at this time.

Indiana Law on Judicially Dissolving a Limited Liability Company

Indiana has no case law on dissolving a limited liability company. The statute setting the procedure for judicially dissolving a LLC is IC 23-18-9-2:

On application by or for a member, the circuit or superior court of the county in which the limited liability company's principal office, or if there is none in Indiana, in which the registered office is located, may decree dissolution of the limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.

Which made Judicial Dissolution of the Unprofitable LLC from New York Business Divorce Blog very interesting. New York's statute parallels Indiana's 23-18-9-2 without any significant differences and there is case law interpreting the statute.

Thinking over the argument regarding profitability as grounds for dissolution, I can see why the New York judges considered lack of profitability as grounds for dissolution but I think the argument against this position is the better one. I cannot think of any judges I am acquainted with having any experience in business. I can see them thinking that an unprofitable business equates to a failure of the operating agreement.

I see here a reference for us in Indiana for litigation purposes and a bit more. I read the following as something for us to think of when drafting a LLC operating agreement:

Profitability or the lack thereof, by itself, clearly is no basis to grant or deny dissolution, assuming the operating agreement itself does not set forth some measure of financial distress as ground for dissolution.

Piercing Liability Protections of a Limited Liability Company - Some Ideas by Way of North Carolina

Wilmington North Carolina Business Law and Litigation Attorney Blog has a multi-part article on getting past the personal liability protections of a LLC. This article bears paying attention to for Indiana limited liability companies.

I have yet to see a case from Indiana on the subject but it is one that interests me both from the perspective of creating limited liability companies for clients and also because I may be suing a limited liability company. North Carolina might have some ideas for Indiana. In Piercing the LLC Veil in North Carolina - Part II, the North Carolina statute is quoted:

The North Carolina Limited Liability Company Act protects LLC members from liability for the actions of the LLC. N.C.Gen.Stat. § 57C-3-30(a) provides:

A person who is a member or manager, or both, of a limited liability company is not liable for the obligations of a limited liability company solely by reason of being a member or manager or both, and does not become so by participating, in whatever capacity, in the management or control of the business.

Indiana's has a similar statute:

IC 23-18-3-3 Personal liability of members, managers, agents, or employees
(a) A member, a manager, an agent, or an employee of a limited liability company is not personally liable for the debts, obligations, or liabilities of the limited liability company, whether arising in contract, tort, or otherwise, or for the acts or omissions of any other member, manager, agent, or employee of the limited liability company. A member, a manager, an agent, or an employee of a limited liability company may be personally liable for the person's own acts or omissions.

If anything, Indiana offers wider protection to limited liability companies. Neither North Carolina nor Indiana defines the acts or conduct or omissions that might lead to personal liability.

Apparently, North Carolina lawyers have attempted to use the traditional, veil-piercing factors from corporations law as a guide to piercing the liability protections of the LLC. I must agree with this paragraph:

Of course, such an approach misses the obvious: an LLC is not a corporation. They are different types of business entity altogether. Just because the courts can look past a corporation's liability protection under certain circumstances, it does not automatically follow that those exact same circumstances should cause an LLC member to lose liability protection.

Not knowing the facts of the North Carolina cases, I am left with some guesswork about the reason for using corporations law. Either it is a sign of how conservatively our lawyer's brains work or it is a sign of laziness or both. I would think the better analogy would be to limited partnerships. Whether such an argument gets one any further in piercing a LLC's liability protection is a question for another time but I doubt this argument would be any more successful.

I also suggest reading Piercing the LLC Veil in North Carolina - Part 3. In this part, the argument appears to be that creating a LLC for the purpose of defrauding creditors might lead to a piercing of the veil. I find this appealing as an equity style argument but I keep thinking the evidence had better be pretty and prepare for an appeal if successful.

Limited Liability Companies: A Very Good FAQ from New Jersey

Yes, New Jersey. The New Jersey Lawyers Blog published Limited Liability Company – Questions and Answers. I see little disagreement with Indiana law and some common-sense answers to the questions.

I thoroughly agree with this (see my post "More about do it yourself LLC Operating Agreements"):

Question 5: I know that I can form an LLC online by myself. Why do I need a professional advisor such as an attorney?

Answer: True, you can form the company online, but the mere existence of the LLC offers little protection. A professional can draft the Operating Agreement to include the provisions you want and need and can monitor activities that may cancel statutory protection. You need good documents and procedures to benefit from the statutory protection. Further, you may get significantly more protection from an LLC formed in a different state or country. An advisor familiar with the options can help you make the right decision.

I will admit that the post raises a point for favoring LLC's over corporations that I had never considered:

Question 6: What is the difference between an LLC and a corporation?

Answer: The sole remedy of a creditor of a debtor/LLC member is the charging order against distributions. The creditor of a debtor/corporation shareholder may attach and gain ownership of the shares, thus giving the creditor significant management rights. For asset-protection purposes, the LLC is a better structure.

Yet, I do not see this as a major concern in Indiana. Corporate stock falls within the category of intangible personal property. Indiana's exemption law keeps stock with a fair market value of less than $200.00 in the hands of the owner/debtor. A closely held corporation's stock has no fair market value because of the lack of a market. I think this is an interesting idea but ultimately a wash.

If you are thinking of starting an Indiana LLC, remember that I am taking on new clients.

Partnership Gone Bad

Here is a situation that would give business lawyers a nightmare.

Partners open one business site and then decide to open another site. One partner stays to operate the original location and the other goes out to open the new site. The partner opening the new site drains the bank account, enters into a lease, and generally increases the business' debt without any counterbalancing profit.

What the partner who stayed with the original site does not know is that there are major problems ahead. Think Titanic and iceberg sort of problems.

So long as the other partner had the apparent authority for the lease, then both partners are on the hook.

If the other partner incurred debt for the business, then both partners are liable for the debt.

Liability here means that both partners' personal assets - as well as any partnership assets - are on the table to be taken by the partnership's creditors.

True, the partner who did not sign the lease or run up the bills can seek contribution from the other partner. I presume that the relationship has soured to the point that any contribution will only come after the one partner sues the other for payment of the debts they incurred.

Litigation between partners means that the business is in meltdown mode. The business stops functioning as source of profit. What money there is goes to lawyers.

I do not mean to imply that setting up as a corporation or a limited liability company (LLC) would have solved all the problems of the business. I mean only to say that some problems could have arisen and others would have been minimal.

Remember that if you are looking to start a business in Indiana or have business litigation, I am taking on new cases at this time.

Breaking Up The Business

Be prepared for what can go wrong with a business. You start a business with other people. You do not want to think about the business ending but most people do not want to think about their marriage coming to an end, either.

The New York Times published Making the Breakup Much Easier and I think it gives a non-lawyer perspective on business relationships falling apart. For a more lawyerly post on the same subject follow this link.

"When he tried to cash out, they argued that the business had hit hard times and wasn’t worth anything. (Both restaurants have since closed.) Mr. Ayoub, 51, who now owns Fornino, an upscale pizzeria in the Williamsburg section of Brooklyn, said he walked away from the feud with just enough to pay his lawyer."

Such tangles and many others can be avoided with a buy-sell agreement — basically a business prenup or a postnup, depending on when owners draw it up. In a buy-sell, partners (the process is the same for corporations and limited liability companies) decide what will happen to their interest in the company if events like death, divorce and personal bankruptcy occur.

A buy-sell can prevent an assortment of evils, like becoming unwilling partners with an owner’s heirs, or leaving a surviving spouse illiquid because the remaining owners refuse to buy the survivor’s inherited shares. By requiring a sale under certain circumstances, known as trigger events, and specifying the terms beforehand, the buy-sell avoids conflict and protects everyone, said Louis A. Mezzullo, author of “An Estate Planner’s Guide to Buy-Sell Agreements for the Closely Held Business.”

The best time to arrange the details, which can require 20 pages or more, is before you begin a venture, said Robert E. Gregg, a lawyer with Squire, Sanders & Dempsey in Tysons Corner, Va. Still, Mr. Gregg, who has worked with many start-ups, said there was generally no harm in waiting six months or so until you’re sure the business is workable. Either way, there are issues to sort out.

The article goes on a bit about the different options for the content of a buy-sell agreement:

What are the payment terms and financing? A lump-sum payout is often associated with life insurance that is used to finance a buyout when an owner dies, Mr. Redd said. You’ll need fewer policies if the company buys a policy for every owner, rather than if they insure one another individually, he said. The alternative is an installment sale, with payments plus interest over a defined period. These arrangements are common in buyouts where the owners don’t anticipate a ready source of cash, which could happen if one owner gets divorced or wants to quit the business, Professor Donaldson said. The legal bill to prepare a buy-sell agreement can cost $2,500 to $15,000, depending on complexity. If your budget is tight, you can rely on the free buy-sell agreement that many life insurance companies offer policy buyers, but it will probably cover only an owner’s death, not other trigger events.

I wonder if the fees quoted are not New York fees instead of Indiana fees, but I agree on what increases the costs. The more complexity wanted and needed by a client means more work and higher fees. However, I (again) say that the buy-sell agreement must be part of the documents creating the business entity - the Limited Liability Company's operating agreement, the corporation's corporate by-laws and so on.

More about do it yourself LLC Operating Agreements

I read Operating Agreement for LLC? which gives links to forms. I followed these links and now I am reporting back:

A. How To Form An LLC website:

1. Which has this interesting disclaimer:The above is provided for informational purposes only and is NOT to be relied upon as legal advice. This service is not a substitute for the advice of an attorney and we encourage users to have all documents created on our site reviewed by an attorney. No attorney-client relationship is established by use of our online legal forms system and the user is not to rely upon any information found anywhere on our site. THESE FORMS ARE SOLD ON AN "AS IS" BASIS WITH NO WARRANTIES OR GUARANTIES. If you wish personal assistance in deciding whether the document found on our site is right for you or desire representations and warranties upon the legality of the document you are purchasing in the jurisdiction you will be using it, contact an attorney licensed to practice law in your state.
2. The cost? $16.99.
   

B. The Internet Legal Research Group: Indiana Limited Liability Company Operating Agreement (Manager-Managed):

1. You can see the agreement before paying $9.99.
2. The web page offers lifetime updates but offers no explanation of those updates.
3. Reading over the agreement, I do not think it is as bad as it could be. What bothers me is what I do not see. Readers might want to go back to my articles Getting Out of An Indiana Limited Liability Company and Limited Liability Companies: What Does an Operating Agreement Do For a LLC?.)
   
4. I see no explanation of what is meant by a "A Manager-Managed Limited Liability Company".
5. This disclaimer does not appear on the page for Indiana forms but the main page for operating agreements:

   NOTE: THE FORMS AVAILABLE IN THIS ARCHIVE ARE SUBJECT TO OUR TERMS OF USE AND ARE NOT A SUBSTITUTE FOR THE ADVICE OF AN ATTORNEY. LEGAL ADVICE OF ANY NATURE SHOULD BE SOUGHT FROM COMPETENT LEGAL COUNSEL IN THE RELEVANT JURISDICTION. THESE FORMS ARE PROVIDED "AS IS."

C. The last selection is a PDF document from Jian.com. This one does give one a good idea of the complexity of a good LLC operating agreement and its best feature is it is free. The provider also gives these notice to would be users:

1. Do use it "as-is".
2. They will need to make appropriate changes to meet their needs.
3. "You Should Have this Agreement Reviewed and Approved by a Qualified Attorney at Law Before Using It.

Bottom line? Those using any of these forms are on their own if they use them and get a lawyer. No one from these companies is watching the business person's back - until their get an attorney to help them create their own LLC.

If you want to start a LLC, please do yourself a favor and read all of the articles here about limited liability companies. Just click on the links belows next to the word Labels. Even if you are not from Indiana, there may be useful information for you. Read, know what you are getting into, and then get a lawyer.

Getting Out of An Indiana Limited Liability Company

So you got into a LLC and now you want to get out?

This could be a problem and the solution depends on a few things:

1. Was the LLC set up before or after June 30, 1999?
2. Is there an operating agreement?
3. How does the member want to get out of the LLC?

If the member wants to withdraw from a LLC set up before June 30, 1999 that has an operating agreement, then the operating agreement controls. If this LLC has no operating agreement, then IC 23-18-6-6(b) gives us the answer.

But for a LLC set up after June 30, 1999, the following statute gives a different answer:

IC 23-18-6-6.1
Withdrawal of member; companies formed after June 30, 1999
(a) A limited liability company formed under this
article after June 30, 1999, is governed by this section.
(b) Unless otherwise provided in a written operating agreement, a
member may not withdraw from a limited liability company before the
dissolution and winding up of the limited liability company. A member may
withdraw from a limited liability company only at the time or upon the
occurrence of events specified in the operating agreement and in
accordance with the operating agreement.

Think about this for a moment: you cannot withdraw from a post June 30, 1999 limited liability company unless there is an operating agreement that allows for withdrawal or the dissolve the LLC. Dissolving an LLC is not so easy to do. Think about this as a very, very good reason for having an operating agreement. (You might want to take a look at my article Starting a LLC (Limited Liability Company), Attorney Fees, and Online Services for a bit more of a discussion about needing an operating agreement).

Before dissolving the company, the party wanting to get out may be able to assign their interest to another person. (see IC 23-18-6-3 - 3.1) An assignment means that one gives another person their interest in the LLC - usually for money. Which raises a practical problem of finding someone to take the assignment. With assignments, the statute allows them unless the operating agreement does not.

I think the topic of dissolving a LLC needs a post of its own, but the statutes covering the topic of voluntary dissolution are here.

You Want to Start a Limited Liability Company?

Read Limited Liability Company 101 first. A general article that will not lead you astray about Indiana's law on Limited Liability Companies. What formalities does my LLC have to follow? provides an even more condensed outline on starting an LLC.

Some terms you should know for LLC's:

1. "Operating agreement"
   "Operating agreement" means any written or oral agreement of the members as to the affairs of a limited liability company and the conduct of its business that is binding upon all the members. (IC 23-18-1-16)
2. "Limited liability company" or "domestic limited liability company"
   "Limited liability company" or "domestic limited liability company" means an entity that is an unincorporated association organized under this article. (IC 23-18-1-15)
3. "Member"
   Sec. 15. "Member" means a person admitted to membership in a limited liability company under IC 23-18-6-1 and as to whom an event of dissociation has not occurred.
4. IC 23-18-1-8
   "Event of dissociation"
   "Event of dissociation" means an event that causes a person to cease being a member of a limited liability company as provided by IC 23-18-6-5.
5. IC 23-18-1-3"Articles of organization"
   
"Articles of organization" means the articles of organization described by IC 23-18-2-4 and any amended or restated articles of organization.

Indiana does not require an operating agreement for an LLC. However, I think a well founded LLC has an operating agreement. Indiana law provides a default position for several subject by prefacing several statutes with the phrase "[u]nless the limited liability company's articles of organization provide otherwise...." The subjects where Indiana law provides a default position include the following:

1. IC 23-18-2-2 Powers
2. IC 23-18-4-2 Acts and omissions liability; trustee for personal benefits derived through company; duties of member in company providing for manager
3. IC 23-18-5-3 Allocation of profits and losses
4. IC 23-18-8-1 Persons entitled to bring suit in name of company
   
5. IC 23-18-9-4 Entities entitled to wind up company's business or affairs.
   

If after reading all that you still think your business will survive without a written operating agreement, consider IC 23-18-4-4:

A written operating agreement may do the following:
(1) Eliminate or limit the personal liability of a member or manager for monetary damages for breach of a duty provided for in section 2(a) of this chapter.
(2) Provide for indemnification of a member or manager for judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which a person is a party because the person is or was a member or manager.

The next question needing answered is: to have managers or not. I think an LLC with more than one member needs a manager but I will leave that explanation to another day.

Meanwhile, if you want to learn more about business services then click the link below that reads "start ups". You should especially read my article Starting a LLC (Limited Liability Company), Attorney Fees, and Online Services.

Limited Liability Companies: What Does an Operating Agreement Do For a LLC?

Let us look at a few things the operating agreement brings to running the LLC. I already discussed several situations where not having an operating agreement may cause problems for the LLC's members in Getting Out of An Indiana Limited Liability Company. Now about some good things the operating agreement brings to the LLC.

The written operating agreement provides through Indiana Code 23-18-4-4 the essence of a limited liability company:

A written operating agreement may do the following:

(1) Eliminate or limit the personal liability of a member or manager for monetary damages for breach of a duty provided for in section 2(a) of this chapter.
(2) Provide for indemnification of a member or manager for judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which a person is a party because the person is or was a member or manager.

A written agreement extends the statutory limitations on liability found at IC 23-18-4-2(a).

IC 23-18-4-5 Operating agreements; objectives describes the general outline for an operating agreement.

(1) The manner in which the business and affairs of the limited liability company shall be managed, controlled, and operated, which may include the granting of exclusive authority to manage, control, and operate the limited liability company to managers who are not members.

(2) The manner in which the members will share in distributions of the assets and the profits or losses of the limited liability company.

(3) The rights of members to assign all or a portion of their interests in the limited liability company.

(4) Classes or groups of at least one (1) member having certain relative rights, powers, and duties, including voting rights, and may provide for the future creation, in the manner provided in the operating agreement, of additional classes or groups of members having certain relative rights, powers, or duties, including voting rights, expressed either in the operating agreement or at the time the classes or groups are created, including rights, powers, or duties senior to those of at least one (1) existing class or group of members.

(5) Classes or groups of at least one (1) manager having certain relative rights, powers, and duties, including voting rights, and may provide for the future creation, in the manner provided in the operating agreement, of additional classes or groups of managers having certain relative rights, powers, or duties, including voting rights, expressed either in the operating agreement or at the time the classes or groups are created, including rights, powers, or duties senior to those of at least one (1) existing class or group of managers.

(6) The circumstances in which an assignee of a member's interest may be admitted as a member of the limited liability company.

(7) The procedure for the following:

(A) The right to have a member's interest in the limited liability company evidenced by a certificate issued by the limited liability company.(B) Assignment, pledge, or transfer of an interest represented by the certificate.
(C) Any other provisions dealing with the certificate.

(8) The method by which the operating agreement may be amended.

Notice the statute does not specify how the LLC shall implement these powers in the operating agreement's language. If and then how the LLC's members decide to implement these powers complicate creating an operating agreement. That other statutes offer options for the LLC's members to include or not make an LLC operating agreement a tailor made product.

I assume anyone reading this is probably interested in starting a business. I seriously suggest that you take the time to read my archives on start ups and limited liability companies. Links to these archives are directly below next to Labels.

Starting a LLC (Limited Liability Company), Attorney Fees, and Online Services

Recently, I got the following e-mail from a fellow named Phil:

i set up an LLC myself for less than 300. it was about 80 dollars if i remember on the indiana treasurers website. an operating agreement?? you are hilarious

From what I could see Phil responded to the following advertisement I placed on the Indianapolis Craig's List:

My rates vary from $300.00 for reviewing the documents you prepared to $2,500.00 for my preparing all the documents and providing the services for creating your Limited Liability Company.

Phil did not respond to my e-mail to him but he gave me some things to think about: the public's perception of attorney fees, how the legal profession needs to deal with the do-it-yourself crowd, how the legal profession needs to deal with on-line form services, and limited liability companies in general.

I have no great dislike of the DIY crowd. Frankly, I see these types as being under serviced and that advertisement means to help them. Those choosing to do any legal work on their own also offer other, profitable opportunities for lawyers. When a person does set up a business but does it wrong, they have created the opportunity for lawyers to make lots of money. I suspect Phil belongs in this group, but more about that later.

I suspect when the public think about lawyer's fees they only think of them as being overpriced. Lawyers do not explain why this fee for that service. I had this topic in mind when Phil sent his e-mail. I have several articles on my Indiana Divorce & Family Law Blog about the debate on hourly versus flat fees and why I have converted 99% of my family law work to a flat fee (you can access these here and here and here). Certainly take a look at Greatest American Lawyer's article Clients Who Don’t Understand Value.

Business people can find a service online that purports to create a LLC for $399.00, $164.00, $248.00, or $399.00. Anyone can find these and similar service just by typing "start an llc" into Google. Lawyers need to get used to these services as competition. We cannot turn up our noses and ignore them. We need to explain to the public what is wrong with these services.

I used "purports" as meaning "[t]o have or present the often false appearance of being or intending; profess...." I do that for three reasons. First, these companies little more than what anyone in Indiana can do for free. Indiana's Secretary of State provides the forms online for starting a business (Click here). The Internal Revenue Service provides the same kind of fee, online service for obtaining an EIN number ( Just go to irs.gov). I know this is so because I practice in this area of law. The general public lacks my knowledge. But don't these companies provide a bunch of other documents? Yes, which brings me to the second reason I wrote purports.

No company I looked at provided the prospective LLC with an operating agreement. I infer from Phil's e-mail that he did not get one and does not understand the importance of an operating agreement. Without an operating agreement, no LLC exists even if you are registered with Indiana's Secretary of State. One company provides a sample operating agreement. Since I do not want to pay for the service, I cannot say only thing about what is wrong with this idea. You need to know how to adapt these samples to your own use. Take a look at IC 23-18-3 to get an idea of the options available to the LLC in its operating agreement, and these are only a few under Indiana law.

Lastly, I question the advice possible from these companies. Let me tie this back into the discussion about attorney fees and lawyers. Let me explain that clients do not pay for paperwork they pay for knowledge. What makes a legal service is the giving of legal advice. When a person makes money by giving legal advice for a fee without being licensed to practice law then that person is practicing law without a license. I doubt the costs of practicing law without a license makes it worthwhile for these companies.

Here is what you get from these companies: services you can do on your own, no operating agreement created for the LLC, and no advice on what the business is trying to do.

What lawyers do not do is make clear what we do. Outside of the operating agreement, I am not offering a document preparation service. If the client wants to do what they can on their own and only wants me to review what they have done for mistakes, I adjust my fee accordingly. For example, a client obtains the Articles from the Indiana Secretary of State and the EIN number from the IRS and has a draft operating agreement. My fee would be the minimal amount because of these things:

1. The work I do not have to do.
2. The work I have to do requires no creativity on part but only my experience and knowledge.
3. I will spend my time with the client wanting to know their objectives with a LLC, their objectives with this specific LLC, and evaluating whether their methods match their objectives.

Not only do my fees increase with the amount time I must spend but even more on the amount of creativity I must expend on producing an operating agreement.

Which brings me to limited liability companies in general. I already mentioned a bit about the importance of an operating agreement. The operating agreement serves to carry out the two main purposes for a LLC - carrying out its business and how it interacts with its members. The liability limited by a LLC is the member's personal liability - the bank accounts, assets, and income in their own names. An operating agreement that is faulty against the wider world removes that protection for its members. Between the members, an agreement that does not address dissent or dissolution poses a risk to the ongoing business. Resolving either type of problem in court costs a great deal more in dollars than its does in creating a functional operating agreement. I had one case involving a LLC dissolution where one side's attorney fees were $40,000.00 and the other side $50,000.00 at the time of mediation and without a trial.

I know this piece is rather long but before I go I think I need to make one more point about the costs of an operating agreement. I think I have explained its importance well enough and have made a sketch of what it is supposed to do for the LLC. I charge more for creating an operating agreement from scratch because an operating agreement is really a tailor made document that depends on the needs and wants of each business. I automate my documents with HotDocs but I have not been able to find a way to build a suitable template for LLC that covers all points. In other words, these things require too much detail from and for a specific business to be made into an automated document. Which is probably another reason these online companies only provide samples.

Over the next few weeks I will be writing more on the generalities of limited liability companies. You will find later articles by clicking on the link below that says "Limited Liability Companies (LLC)". Meanwhile, if you are thinking of starting an Indiana business, I suggest you take a look at my articles on start up here. Please come back, feel free to make any comments (excluding spam and rants).

Update 1/18/2008: For more reasons why an LLC needs an operating agreement, see Getting Out of An Indiana Limited Liability Company.