Small Business Horror Story #2: No Operating Agreement and the “Eraser”
I recently met with one member of a two-member LLC with no operating agreement. We’ll call my client Jane and her partner Joe. Jane was concerned because Joe was engaging in activities that could jeopardize reimbursements the company receives from the government for the services it provides. Jane voiced these concerns and Joe promptly “erased” her from the company. He physically locked her out of the office, refused to return her mailbox key, removed her name from and access to the company’s bank account, and convinced most of the employees to sign an agreement prohibiting them from speaking with her. Without an operating agreement, nothing technically prevented Joe from doing all these things, even though Jane was an active member in the company. Luckily, Jane managed to get her name back on the bank account, only to find that Joe had emptied the account.
I am currently working with Joe’s lawyer to get Jane’s belongings back from the office, to compensate her for her half of the company to which she is entitled under the law, and to remove Jane from any further obligation with the company. If Joe wants to commit fraud, he can do so, but he can’t drag Jane with him. Unfortunately, in addition to the drama already described, Jane is the sole guarantor on two of the three leases the company held and the landlords aren’t willing to release her.
Like any other contract, an operating agreement is only as good as the people signing it. However, operating a business without one presents such ample opportunity for one owner to completely bulldoze the other, it’s a risk probably not worth taking.