North Carolina Business Court Decision Shows Importance of an Operating Agreement for Your LLC
If you are a member or an owner of an LLC, you should ensure that your company has an operating agreement, the agreement governing how the company is to be owned and managed.
A recent case from the North Carolina business court shows the importance of knowing what the operating agreement says.
In the case, an attorney (who also with part owner of the limited liability company in question) sued the company when it breached an agreement with him. One of the owners, or members, had signed an agreement hiring the attorney’s firm to represent the company.
When the company backed out of the agreement, the attorney filed a lawsuit to collect the amount he claimed was owed to him. The other owners denied that the attorney’s agreement was enforceable because they said there was not a majority who agreed to the attorney’s retainer agreement.
The other owners of the company produced evidence that the operating agreement did not permit the company to enter into agreements – including agreements for legal services – without formal agreement from a majority of all the owners. In this case, a majority of the owners had not agreed to sign the attorney’s retainer agreement.
Reviewing submissions from both sides, the Business Court ruled in favor of the company and against the attorney.
The Business Court explained that whether or not the members of an LLC are actually aware of the actual terms of an LLC’s operating agreement, the law deems them to have knowledge of the operating agreement’s terms. Here, said the Court, the majority owner of the LLC never approved the attorney’s agreement, and “without such approval ... lacked authority to bind [the company] to the agreement.” Thus, the attorney lost his case against the LLC.
This case teaches business owners an important lesson: that not only should you have an operating agreement for your LLC, you also need to know what it says. An operating agreement is important because it provides the rules for how the company is organized, how it does business, and how profits, losses, and decision-making authority are allocated.
None of us would use our own money to play a game if we didn’t know the rules. The same is true with an LLC or other business entity like a corporation. The world of business is a high-stakes game where the participants play for keeps. Whether you are just starting a business or you have been running one for years, you must make sure you stay knowledgeable about what the terms of your operating agreement are. If you don’t know, you should talk to a qualified attorney about what yours are. After all, when it comes to LLCs and corporations, you can often change the rules of the game by amending your operating agreement or corporate bylaws if you need to.
A link to the decision of the North Carolina Business Court is here: Rossabi Law PLLC v. Greater Greensboro Entertainment Group, LLC.
Dye Culik PC is a Charlotte, North Carolina law firm handling business law and litigation for businesses, entrepreneurs, franchises, and executives. Contact us or give us a call at 980-999-3557 if you need help or legal advice for your business. Follow us on Instagram for the latest updates on CLT businesses and franchises.