5 Common Va LLC Traps for the Multi-Member LLC Business in Virginia
When it comes to
starting a business such as an LLC business in Virginia, attorneys
have a common saying and it is “partnerships are sinking
ships.” Unfortunately, this saying has a lot of merit in the
business world. Anytime one decides to start a business venture
with another person including the forming of a Va LLC for one, there is a more than 75% chance that the two
people will eventually have fundamental and disruptive business
disputes related to the LLC business in Virginia.
When you start a
Va LLC, make sure you know this and plan for ways to address this
immediately after LLC formation. Virginia does not
automatically have set rules and provisions to address disputes in
an LLC business in Virginia.
Statistics have
stated that
there is a close to 50% chance that the business will fail not
because of the business itself but because of fighting and issues
between business partners. Litigation attorneys love these
statistics because business partner disputes create a lot of
billable hour business for them and their law firms.
For the new
business owner who is planning to start an LLC business in Virginia
and go into business with at least one business
partner, the last thing on his or her mind is that anything will
ever go wrong: “Oh – John is my good friend and we will always be
able deal with any thing.”
If you do not plan, you are planning to fail. A
Va LLC with multiple members likely needs business
prenuptial planning even more than marriages today! Here are 5
Traps that you should avoid if you are planning on starting a
multi-member LLC business in Virginia.
Trap #1: Don’t Partner with
Strangers when you start a Va LLC
Deciding on who
you are going to do business with BEFORE you start your Va LLC
business in Virginia is just as important as deciding
who will be your wife or husband. You need to do due diligence.
Talk to people that the proposed Member has done business with
before. Talk to his or her friends or co-workers. Really think
through whether you both have the right personalities to stay
together through good and bad times.
Take the advice
of those who have learned this the hard way. Many tell us that they did
not have a good feeling in their guts when it came to their partner
at the time they started an LLC business in Virginia,
but they chose to ignore those feelings. If they had to do it over
again, they would have honored their gut feelings and rejected the
partner or imposed additional planning at the start of their Va LLC. Pay attention to
those signs at the beginning of a business relationship.
Starting a new
LLC business in Virginia is so rewarding, but it is also challenging and quite
stressful. Make sure that your partner business team understands
this and that each person has the right personality, business skills
and persistence to work with you through the trials and
tribulations. Almost every successful LLC business in Virginia has had to go
through stressful and uncertain times. These times and how
management and the Members choose to address the challenges actually
make the business a success!
Trap #2: Don’t Take the Admission of
New Members Lightly at anytime with your Va LLC
Your Virginia LLC Operating Agreement Should
Have Restrictive New Membership Provisions
What happens when
one Member wants to admit a new partner to a Va LLC and another
Member does not want to have this new person involved in the LLC
business iN Virginia? All new business partners need to discuss
this issue at the beginning of the business and decide how they want
to address this issue. Should a majority of the Members have to
agree? A supermajority? Or even a unanimous vote of all Members?
This is not an
easy decision for any LLC business in Virginia. Often, when an LLC is considering admitting a new
Member it is because the Va LLC wants to raise money and receive funds
from a new Member in exchange for issuing a Membership Interest in
the LLC. If you require a unanimous decision, then if one Member
refuses to agree, it is possible the Va LLC will go bankrupt because it
is unable to raise the money it needs.
Trap #3: Don’t Allow the Free
Transferability of Membership Interests in your Va LLC- Your
Virginia LLC
Operating Agreement Should Have Restrictive Provisions when it comes
to selling ownership interests in the LLC
Your LLC business
in Virginia will evolve and change over time. Without proper
transfer restrictions in a Virginia LLC Operating Agreement or other contract
among Members, there is nothing in the Va LLC laws themselves that prevent a
Member of an LLC from transferring his or her ownership interests to
another party.
Let’s use an
example to explain how disastrous this can be. Assume you form
an LLC business in Virginia with your sister. Over time, your sister decides she wants
to spend more time with her family and the stress of the growing
the Va LLC business is too much for her. The next day you find out that she
has sold her Membership Interests in the Va LLC business to her
neighbor. You now have a new business partner and co-owner of your
LLC business in Virginia. Even worse, the neighbor has fundamentally different
ideas about how the business should be managed.
All of these
issues can be avoided by having the proper transfer restriction
provisions in the Virginia LLC Operating Agreement of your Va LLC or by entering into what
is known as a Buy Sell Agreement among Members.
Trap #4: Be careful who you give
LLC Authority to in your Va LLC business
Did you know that
the Va LLC laws include certain “agency laws” that you should know
about before starting to operate your LLC business in Virginia? These agency laws say that in a member managed
Va LLC, if an
LLC Member enters into contract obligations or agrees to other
liabilities on behalf of the LLC, then the Va LLC is liable for those
obligations and liabilities. What if the LLC Member owned only 1%
of the LLC business iN Virginia and did not have any real authority to do so? It does
not matter- your Va LLC will still be on the hook in most cases.
So, you always
need to be sure that your Va LLC Member partners are trustworthy and
that the Virginia LLC Operating Agreement has clear provisions setting forth
a structure for when a Va LLC Member has or does not have authority.
If you have concerns about authority with Members, there is a
planning method that can be used by an LLC business in Virginia to avoid these risks.
Consult your LLC business attorney.
Trap #5: Don’t Forget to Document
Everything in your Va LLC Business
When a marriage
ends up in a nasty divorce, the situation becomes a major “he said
she said” battle. That battle ends up costing the man and woman
thousands of dollars in legal fees.
This same battle
occurs in many business partner disputes that can arise in an LLC
business in Virginia. A Va LLC Member will claim
that the other Member agreed to something that the other Member
disputes. Or a minority Member will claim that the majority Member
of an LLC business in Virginia abused her discretion by not following the LLC governance
rules for that Va LLC.
In a business
LLC in Virginia, this battle can be greatly minimized because a
properly maintained Va LLC should
document all LLC decisions made by the LLC business in Virginia. LLC decisions are documented in written
LLC resolutions and every Va LLC should have LLC resolutions to document
all major LLC decisions and decisions among LLC Members.
Many of the
topics in this Article require the advice of a competent business
attorney who can tailor the planning for an LLC business in Virginia
to the specific needs of a particular Va LLC.
Please consult an LLC attorney in
Virginia for assistance after you have
formed your Va LLC.
