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LLC Operating Agreements

LLC Operating Agreements

LLC Operating Agreements

LLC Operating Agreements in Illinois

What to Put Your Illinois Company’s Operating Agreement

LLC Operating AgreementAn Operating Agreement is the contract of your Illinois company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization for LLCs, and even an end, called a dissolution. The Operating Agreement is a long contract that explains how your company is managed, how new owners come into the business, how existing owners leave the business, and more.  Here’s an article all about operating agreements for your cannabis company.

Illinois Company Operating Agreements are Flexible

We have done scores of operating agreements, many for Illinois companies.  Illinois companies often require additional care in drafting their operating agreements because of the amount of money and free cash flows that they kick out during their operations. Therefore, it is very important to review and understand your cannabis company’s operating agreement.  Please read yours with a lawyer or advisor that is experienced in them and ask questions until you understand everything about how your cannabis company operates – hence the term Operating Agreement.

What are the elements of an Illinois LLC Operating Agreement

Operating agreements, for any company – not just Illinois businesses – have different sections, or articles. Like chapters in a book, articles in an operating agreement break down the contract into logical subgroups where specific things are discussed.  The common sections, or articles, in operating agreements that we use include:

  1. Recitals
  2. Formation of Company
  3. Members & Units
  4. Management of the Company
  5. Rights & Obligations of Members
  6. Actions of Members
  7. Contributions to the Company and Capital Accounts
  8. Allocations, tax and distributions
  9. transferability
  10. Issuance of Membership Interests
  11. Dissolution and Termination
  12. Books and Records
  13. Miscellaneous Provisions

 

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Illinois Company Operating Agreements Basics

You may not know it, but your business is just a ball of contracts with all the rights of a person, from owning property, to entering into contracts, and even suing in court, but does not include the right to vote in public elections, but you can spend money on supporting the people running for office.  Don’t be so upset, America itself is basically a large corporation – most municipalities are actually corporations. See these useful informational tidbits? – everything you’ve come to expect from…

RELATED: Subscribe to Illinois Legalization News

learn all the differences between corporations and LLCs that may have huge impacts on your business if it raíces money, or just its day-to-day operations. 

This is another of our Fundraising.  If you are getting into the Illinois industry and you are under a million dollars for your dispensary team, or under 4 million for your craft or micro grower team – then this is the content for you,

You may not know it, but if you are in an LLC for your Illinois company, or on its application, then this is how your company as a legally fictional person literally operates.  It is the owners’ manual for your company – which basically means it is like the one for your car – in the glove box and probably not really read too closely. 

That is a mistake – corporate entities – whether LLCs or corps – can only do what their contracts say they can do. So it is not only quite crucial – but expletive deleted important to know how your company runs its operations and distribution’s of profits – to raising capital – to diluting your shares. 

 

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Why are LLCs so popular now instead of corporations?

Because LLCs are flexible – you can have an operating agreement between the owners, called members of the LLC, that literally governs the whole life trajectory of the business.  We are going to discuss several different permutations of operating agreements depending on the goals of your business venture. 

Remember that LLCs are flexible? What does that mean? 

 from reading you Illinois company’s operating agreement I can tell:

  1. If it was set up to be sold to the highest bidder
  2. If it was to be a family business for generations
  3. If it was to operate a real estate business
  4. If it was to operate a big one time deal and then have parties part ways
  5. If the parties did not care what the other owners did
  6. If the the parties wanted specific duties to the business
  7. If it was to hold control in very specific ways – this could be a social equity operating agreement.
  8. If it was to be taxed as the business owner, an s-corp or a c-corp. 
  9. If the profits interest went to different things despite the ownership percentages
  10. How it would die – dissolution
  11. How the owners get in or out
  12. And that’s more than enough points to tell you about how flexible this contract is.

Isn’t that amazing one contract can be set up in almost any number of ways for your unique business situation – so please get your tax guy involved immediately and your corporate consultant and lawyer and discuss it to suit your company’s needs.  We can talk about your company’s needs to see what your objectives are – what your exit is – a big check list of things that if you want to get. LLCs are great because not only do they have the flexibility to do whatever your business really needs, they also have relaxed formalities and greater restrictions on transferability of ownership interests. 

You probably know that corporation’s ownership is referred to as “shares” in the company while LLCs have “units” of membership in the company. 

So why are these LLCs so popular – because about 50 years ago some business people in Wyoming asked, “Wouldn’t it be great if you can get all the protections of the corporate shield but not have to follow all the rules?”  Heck Yeah – it would. Only in America.

In an LLC you can set it up so that owners, shareholders in corporate speak, or members in LLC jargon, have no duty to one another.  Just be like – I did this – deal with it. That could be a part of the business. We have an operating agreement that we like to call the fugghetaboutit – because not only does it allow you to have the least amount of duties to your partners as a matter of law, but the freedom to leave the business on a moment’s notice, dissolve the business and leave it in the past. It’s the LLC for the deal when you got just one little thing to do.

Then you got the protect yah neck, son – that’s just a single member LLC – The operating agreement basically gives the liability shield and very little else.  I have seen these be just a few pages, but you get more people involved and watch the operating agreement grow into the dozens of pages, maybe over 100 depending on the exhibits attached. 

Then we have another operating agreement that I like to call the flip – this company is basically on a mission to be sold – the LLC comes with an exit so you are almost for sale from the day you go into business on the terms set by the operating agreement. In this format, we use the tag-along-drag-along clause as a term of the operating agreement to provide protections to the minority owner of the company the “tag along” to be “dragged along” in the full sale of the company, or substantially all of its assets. So you can see, both the minority owner and the majority owner are in agreement as to what will happen when the offer to buy comes along.

Then I have one called the generational wealth – where you have the business being able to have rights of first refusal to retain ownership – often inside a family owned business. It is a sticky wicket to get into or out of – and that’s the point.

There are so many variants that we can make up a new type of operating agreement that we could make, like a ‘give it to the people’ where the company agrees to an ESOP to become an employee owned company at a certain point in time in the future.  I guess we could set that one up for you. We’d have to research it though.

Remember that your company is just a ball of contracts related to a statute – a legally fictional person that gets to generate you money – but you’re responsible for bearing the risk as the entrepreneur. 

The reason you need an operating agreement when raising capital is because it tells your prospective investors exactly what your company is legally obligated to do.

That  is the plan – the operating agreement spells out how it will all go down.  From management, to new owners, to getting out of your ownership, dissolution of the company, everything. 

can you run your LLC like a corporation?

In corporation terms, an operating agreement blends shareholder agreements and bylaws all together – but in theory, an LLC could do bylaws separately – in theory.  And as we get to the intersection of these two different type of corporate entities businesses have at their disposal, we can finally answer of the question, can an LLC be run like a corporation?

So you can see that – yes, you can structure a LLC like it is a corporation – but it will be much more expensive than the couple page single member LLC operating agreement.  The operating agreement has to blend agreements about new owners, types of owners, officers and directors, voting rights, tax consequences – so many things.  

Conclusion on LLC Operating Agreements

So why not just start with a corporation?  You can, but they have greater formality, less flexibility, and easier exchange of your shares. An LLC can become a corporation – so if your first 5 years are expected to be you and your core team operating the business before it is geared up and sold, or who knows.  Then you can start to set up the corporation as best you can, but borrower the flexibility and lack of formality that the LLC has, plus get more restrictive ownership, to keep your team together until you are ready to become a full on corporation that ends up getting sold for stock – a corporation can still buy an LLC. 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

LLC Operating Agreements

LLC Operating Agreements

What to Put Your Illinois Company's Operating Agreement An Operating Agreement is the contract of your Illinois company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

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How To Raise Money Through A Private Placement Memorandum

How To Raise Money Through A Private Placement Memorandum

Private Placement Memorandum

Raising Money PPM

A PRivate Placement Memorandum (PPM) is a complex legal document that provides great detail into a company and offers a portion of its ownership for sale to an investor, often an Accredited Investor as defined under Regulation D for the SEC. 

Private Placement memorandums could be used to raise capital when a company cannot otherwise access the capital markets.  Perhaps a bank would not loan the company money, but an investor may for a stake in the game.  The PPM would provide detailed information of the equity state being offered in the business.

Private Placement Memorandums in the Cannabis Industry

PPMs are popular in the cannabis industry because of the lack of financing options resulting from its federal prohibition.

Why You Should NOT Use Templates for your PPM

using templates to do your private placement offering is okay – when you are in good hands and they have used such templates to craft and customize private placement offerings for the unique conditions of the specific business deal being offered. 

Unfortunately, some entrepreneurs want to keep legal and consulting costs to an absolute minimum and take a form they got on the internet and try to stick their names in the right places.  This could cause headaches and huge problems if anything goes wrong, which is more likely to happen when you are cutting corners instead of doing the due diligence required.

Here’s a link to Private Placement Memorandum Template Library

FINANCING YOUR BUSINESS THROUGH A PRIVATE PLACEMENT MEMORANDUM

As this article is written, small businesses are being ravaged by the effects of COVID-19. The Small Business Administration is stepping up with all kinds of offerings to help small businesses weather the storm. Still, times are very difficult and uncertain for business owners, and there’s a good chance that credit will be tight over the coming months. For prospective small business owners, the hardest part might be simply finding a bank that is even open and available to meet during the ongoing COVID-19 pandemic.

Fortunately, budding entrepreneurs don’t have to rely on taking on big, high interest loans from a bank. Instead, there is an alternative: the private placement memorandum, or PPM. The federal Securities and Exchange Commission (the “SEC”) provides this helpful guide on the legal basics of a PPMs. In this article, we’re going to go over some of the highlights of the PPM route, which will help you determine if a PPM is the right course for your business.

  1. What Is A PPM?

Generally, when someone wants to sell securities in a company, they have to go through the registration process with the SEC. This applies not only to the Googles and Facebooks of the world, but also to much smaller companies as well. After all, small businesses have shareholders too. 

A PPM is, in simple terms, a way to raise funds without going through the SEC’s burdensome registration process. Instead, you go directly to potential investors. This is a very common route for small businesses, even ones with pretty big budgets. For our Chicago-area readers, some of the city’s most famous and lucrative restaurants, such as Chicago Cut, are actually owned by a small group of shareholders. 

To raise money through a PPM, entrepreneurs can make use of Regulation D, Sections 504, 505, and 506, depending on certain conditions such as the amount of money being raised. Section 504 is limited to fundraises of under $1,000,000, and so is unlikely to be useful for people hoping to open a typical cannabis business, especially a craft grow cultivation facility. For most entrepreneurs, they’re going to be raising money from Accredited Investors.

  1. Accredited Investors & PPMs

Regulation D sets out the definition of an accredited investor. Different kinds of institutions (banks, LLCs, trusts) can be accredited investors, but in general you’re talking about wealthy individuals. These are individuals or couples who meet the following criteria:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).

Private placements are risky by their nature- these are brand new companies fundraising with relatively little government oversight. Investors could very easily lose everything. That’s why it’s so important that accredited investors be sophisticated and financially capable of absorbing the full loss. A typical PPM doesn’t require much information from an accredited investor. They simply have to certify that they meet the criteria. Some entrepreneurs may want to get independent verification, such as bank statements or CPA letters, but that’s not necessary to meet the requirements of Regulation D.

 

  • Why Should I Try A PPM?

 

Starting a business is hard. We just finished submitting all of our clients for the State of Illinois’s competitive cannabis cultivation and transporter application process, and boy did we learn a lot. Your average craft grow facility can cost upwards of $4,000,000 to fully build out. Worse yet, many traditional banks are still reluctant to work with cannabis clients.

The PPM bypasses regulatory hurdles and allows you to go directly to individuals who want to get involved in the industry. These can be people in your community who you know, who have the money but don’t know how to get involved. Accredited investors can be wealthy lawyers, bankers, restauranteurs, real estate brokers, or any number of people who are simply your friends and neighbors.

We’ve put together a PPM package for our clients to help them get started in their entrepreneurial pursuits. The best part about a PPM is that it is highly customizable. You can sell ten shares at $300,000 each, a hundred shares at $10,000 each, or nearly any combination that best suits your needs. Moreover, you can raise money in multiple rounds. We’ve designed our package so that investors can contribute a small, initial sum to help cannabis entrepreneurs finance their application, with the second, larger round contingent on the company actually being awarded the license.

There are countless other ways to customize a PPM to suit your needs and the desires of the investors your hoping to recruit. If you’ve got a plan and a vision, but you don’t quite have the capital, a PPM could be just the solution you need.

Private Placement Memorandums Are Not General Solicitation 

A private placement, unless it is using 506(c), you do not solicit in general to people to raise the money. It is a private placement memorandum – it is a private offering of an ownership stake in your company. So it means that you have a few investors. Your first meeting is a general meeting to get to know if your investor is right for you.  Then you can follow up with them if they are interested in learning more. Often times your PPM includes investment from friends, family, close network connections that you and your business may have.  

David Silvers

David Silvers

Regulatory Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

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Why Do You Need a Buy Sell Agreement Lawyer

Why Do You Need a Buy Sell Agreement Lawyer

Buy Sell Agreements

Buy Sell Agreement Lawyer

Why Do You Need a Buy Sell Agreement Lawyer?

If you are building a business while you form a partnership, you will need help from a  buy sell agreement lawyer. Signing a buy sell agreement with the partner will protect you from unexpected situations and legal issues. That is why a buy sell agreement lawyer can make an agreement that will protect both parties.

A buy sell agreement claims your rights when it comes to difficult situations. Your partner can fall ill or become unable to operate the business the right way. In that case, a buy sell agreement lowers your financial risks of bankrupt or debt. You can protect yourself by signing an agreement that will keep your business intact.

Comparing a buy sell agreement with a prenuptial agreement is the most accurate comparison. In a prenuptial agreement, you can get out of the marriage under certain conditions. At the same time, you can protect your financial operations. A buy sell agreement offers the same rights, just with one small difference. In a buy sell agreement, you can cover all the financial transactions between the business partners. This makes a buy sell agreement more reliable and more effective in terms of financial stability.

Speaking about two common forms of agreements, we can separate the contracts into:

  • Cross-purchase agreement, and
  • Redemption agreement
A cross-purchase agreement happens when the remaining owners decide to purchase the shares of the business that is for sale. In this matter, it is important to know that the mechanism relies on a life insurance policy.

A redemption agreement is another form of a buy sell agreement. Here, we have a situation when the business entity buys the shares of the business. With a redemption agreement, the contract limits the ability of business owners to sell or transfer their ownership stakes in the business.

Both the cross-purchase agreement and redemption agreement are part of the possible contacts between the business owners, and they can mix the two in their business buy sell agreement. The importance of a buy sell agreement covers most of the financial risks that may occur in the business.

How to Know If a Buy Sell Agreement Is Right for Me

If you plan to start a business with a partner, a buy sell agreement can offer many protective points that can change your business perspective. Many life situations are inevitable and we can rely on this kind of contract when the official regulations are necessary for business operations. Your business partner may go ill or die, and that is when a buy sell agreement comes into effect. Your business capital will be protected and you can continue all the future business operations.

Cross-purchase buy and sell agreements contribute to the rights of the business owners. As a remaining business owner, you can buy the interests of the selling owner. This applies when a selling owner is no longer capable of maintaining their business obligations. Buy and sell agreements are also important in the method of determining the overall business value at the beginning of the business as well as when one of the business owners remains the only owner.

Careful drafting of a buy sell agreement can also eliminate or lower any potential estate taxes that apply at your death. In the situation when you want to pass your ownership interest to one of your family members at your death, avoiding the estate tax is one of the possible outcomes.

Do I Need a Buy Sell Agreement Lawyer?

A buy sell agreement lawyer is necessary if you want to avoid state taxes and protect your business capital and operations. With a buy sell agreement, you will be able to buy shares of the business and prolong your business perspective.

A good buy sell agreement lawyer can help you draft the buy sell agreement that protects both your business partner’s interests and your interests. You will have the right to continue the business operations even in the case of illness or death of your partner. It is possible to stay protected and define a new business strategy with a buy sell agreement. A good buy and sell lawyer can help you craft and improve the right contract that protects you in the case of inevitable circumstances.

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

REACH US BY EMAIL