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Limited Liability Companies: Creatures of Contract

Feb 15, 2023 | Forming Your Company, Limited Liability Company

If you’re starting a business, you may wonder which entity is best for your needs. Limited Liability Companies (LLCs) are one of the most common structures used in business (LLC) for personal liability protection, tax benefits, and other advantages they offer. An LLC differs from a corporation and can offer much more flexibility. While corporations are creatures of law, LLCs are creatures of contract.     

Contracts Govern Limited Liability Companies

Corporations are governed by laws. While laws exist to govern Limited Liability Companies, LLCs are not solely governed by LLC laws. While corporations have a long history in the business world, LLCs are a modern development. Unlike with corporations, what the law dictates is not necessarily important in an LLC. Instead of being governed by statute, they are controlled by contract. That contract is called an Operating Agreement.  Although there are default laws that must be applied absent a contract or contractual provision, they can be avoided with a well-drafted operating agreement.               

LLCs are Run and Controlled by Members 

In an LLC, its members have the freedom and flexibility to decide how they want to run their company, share management responsibilities, and assign financial rights. This level of control and customization is in contrast with corporations that must abide by statutes in how the company is structured and governed. Corporations have shareholders who do not automatically have the right to participate in management or receive a dividend.   

Although there are variations on a theme by jurisdiction with how corporations are structured, these differences are merely variations. Despite the state where a corporation is formed, various corporate formalities must be carried out to ensure compliance — including holding shareholder meetings, maintaining minutes, and taking measures to keep the company in good standing.                     

Default Provisions Can Be Avoided with an LLC Operating Agreement

If you have an LLC, the default rules of New York law need not apply to how your company operates. LLCs have more flexibility regarding how they operate than corporations — and a well-drafted operating agreement lets you have full creative control over how you run your business. It’s unlikely that you had every default provision in mind when it comes to how your LLC should operate. 

The default provisions that apply absent of an LLC operating agreement should be avoided, specifically those that address:

  • Who has the power to bind the LLC — While it is usually the LLC members who have the authority to bind the LLC to legal contracts, some LLCs may be manager-managed instead of member-managed.
  • Indemnification and advancement — Indemnification is discretionary in an LLC. An LLC’s operating agreement can restrict, change or eliminate the right to indemnification or advancement
  • Where and what you can sue for — It’s crucial to include a clear provision about the dispute resolution methods that should resolve a conflict, such as mediation or arbitration. A solid operating agreement should also specify precisely what members can sue for, including dissolution. 
  • Dissolution procedures — The procedures that must be followed to conclude the affairs of the LLC should be included in the operating agreement, otherwise, state law will apply by default.    

A skilled business law attorney can help with an operating agreement that ensures the needs of your business and your goals are met.  

Contact an Experienced New York Business Law Attorney

If you’re forming a company, the entity structure you choose can affect not only your day-to-day operations but your long-term success. The skillful business lawyers at Brinen & Associates are dedicated to helping clients with entity formation matters, drafting operating agreements, and a wide variety of business law issues. Call (212) 330-8151 or send us a message to learn more about our legal services. 


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I formerly worked as a satellite employee from my home state of New Jersey. I ended my employment with my former employer in 2016. In 2018, I was sued by my former employer for $1.1 million in Illinois State Court. I was referred to Brinen & Associates, LLC by a friend who is a client of the firm. Brinen & Associates, LLC came highly recommended. I contacted Joshua Brinen and then had a consultation at his office with his colleague Mark White. Together, Messrs. Brinen and White explained my options...

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