Why is it important to create an operating agreement?
Posted by Harsharn Makkar
I generally get asked why do I need to create an operating agreement for Limited Liability Company (LLC)? Isn't it enough to register the company with the Secretary of State?
My response is if, as the owner of the company, it is important to you to decide how or who runs your company rather than the state legislators then it is critical for you to create an operating agreement. Registering the LLC simply puts the public on notice that you intend to do business as LLC and it does not tell the world what rules and procedures you intended for running your company or resolving any disputes. Even though there is no requirement that you must create an operating agreement. However, creating one allows the owner the freedom to choose a method for running his/her company rather than legislators dictating the choice. If there is no operating agreement in place, the courts will apply the default rules meaning the rules that the state legislators selected when they enacted the LLC statute. Although avoiding application of default rules ought to be important, there are other reasons for creating operating agreement as well such as understandings variations between different entities and clarifying terms between parties.
For example, LLC interests can and do differ in management, capital, profits and losses. Whereas, the law for business corporations mandates that shares of capital stock of the same class or series convey identical rights and preferences. If an investor A pays cash for 1000 units in an LLC but investor B contributes only sweat and equity for 100 units, investor A would receive his cash investment plus preferred return on that capital investment before the profits can be shared on the basis of the number of units each investor/member owns at the time of sale. Thus, unless differences between economic interests are defined in an operating agreement, the members may not realize or have intended the consequences from lack of knowledge and/or understanding.
There are various other reasons for creating operating agreement, which are as follows:
• Whether tax distributions should be made on the basis of the allocation of the LLC’s taxable income or economic sharing percentages?
• What happens when the LLC does not have enough cash flow from operations to make the required distributions?
• What happens if one of the members is foreign citizen? (Of course this list is not meant to be exhaustive)
Harsharn K. Makkar practices Corporate Law in the Atlanta area. She can be reached at 404-200-4072 or hersh@makkarlaw.com.
Why is it important for a company to manage its metadata?
Posted by Harsharn Makkar
A company must manage its metadata due to the risks associated with unintended disclosures. Many programs create data (invisible to the untrained eye) about data, which becomes a part of the visible text of the document in a single file. This unseen information if transferred to a recipient along with the document can have dire consequences for the company. For example, most documents reveal the author, creation dates and other similar information.
General information about the sender may be harmless under most circumstances. However, other information such as comments added to a document during editing stages by the company executive and/or lawyer may haunt the company if those comments reveal confidential information and/or a formula or a trial and/or negotiation strategy.
In addition, if employees are not educated about metadata, they may inadvertently post a document on the web that contains damaging information. For example, consider the consequences on your bottom-line if competitors gained information about your profit margins or manufacturing data from the workbook file posted on your website because an employee did not realize that a feature like fast save simply appends the changes at the end of the document rather than replace it with actual edited material. Lastly, metadata matters because sensitive data that becomes part of a given file may be stored off of company servers in various places as well as formats around the world without company’s knowledge or even capabilities to track it.