Six Clauses Essential for Every LLC – Part 1

llc, asset protection, real estateA properly drafted operating agreement can greatly enhance the liability protection. An improperly drafted operating agreement will do the opposite, leaving creditors a superhighway of access to the assets. The issue is how to determine if your operating agreement is properly drafted or not.

Most LLC operating agreements that I review fall into what I refer to as the "online variety". These agreements are simple form documents, mass-produced for the uninformed consumer who mistakenly believes that one LLC is no different than another. In some cases, the operating agreement is nothing more than a restatement of what was filed with the particular state of formation. Given sufficient time, the falsity of the belief that one operating agreement is as good as the other may make itself known – usually in a lawsuit, audit or other inopportune time.

If you want to sleep better at night and have a high degree of asset protection, make sure your operating agreement is drafted by a professional (hey, even if they make a mistake, you have someone to blame and potentially recover against) and make sure your operating agreement has what I believe are "6 essential asset protection clauses".

The following are the first 3 of my 6 essential clauses:

1. Clause to Eliminate Mandatory Distributions
A primary benefit in establishing an LLC is outside creditor protection (i.e. you will not lose your membership interest in the LLC to a judgment creditor). This protection is commonly referred to as "charging order protection". A charging order gives a creditor the right to attach distributions made from the LLC to the charged member. If an investor found himself in this situation, he would undoubtedly decide against taking distributions if he was also forced to pay the creditor with the charging order. Unfortunately, if his operating agreement requires annual distributions for taxes or profits, then his hands are tied and the investor will be forced to issue annual distributions to the benefit of his creditor.

View the remainder of my post here on Bigger Pockets.

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