Avoiding a Common Pitfall for Restaurants Organized as LLCs
Tuesday, June 17, 2014
Failing to adequately address the legal affairs of a restaurant can be as fatal as poor service and unappetizing food. Yet, as the costs for opening a restaurant in New York continue to skyrocket, aspiring restaurateurs mistakenly consider legal representation an unaffordable luxury rather than a necessity. The purpose of this legal bulletin, then, is to educate the aspiring restaurateur on how best to avoid the common pitfalls associated with limited liability company operating agreements.
In a short-sighted attempt to save money, restaurateurs will sometimes form limited liability companies without first consulting an attorney and will instead rely on a document filing service. The ensuing problem, when relying upon such formulary vehicles, of course is that all too often the limited liability company is being formed without an operating agreement or with an improperly drafted operating agreement.
An LLC operating agreement is a contract that sets forth the rights and responsibilities with respect to the ownership and management of the limited liability company. The failure to have a properly drafted operating agreement generally surfaces at the most inopportune moment: the time in the restaurant’s lifespan when the members (the owners) are in conflict and disagreement. In the absence of an operating agreement, restaurateurs are subject to state laws that govern critical corporate governance issues, such as member expulsion.
The purpose of a properly drafted LLC operating agreement is to:
1. Provide a written outline of the rights and responsibilities of the members (the owners)
2. Provide a mechanism for resolving disputes among the members,
3. Address the major ownership and operational matters at the outset of the restaurant formation
4. Provide a buy-out mechanism, a procedure for capital-calls, and an expulsion mechanism
Having a properly drafted operating agreement that addresses the issues set forth above drastically reduces a restaurant’s legal exposure in the event of a business divorce and ensures the members are in agreement about ownership and operations.
A properly drafted operating agreement provides restaurateurs with a strong foundation to navigate and ride out the myriad difficulties of owning and operating a successful restaurant in New York. In the long-run, proper legal representation is a cost effective, sound investment in your restaurant’s future
Remember, “An ounce of prevention is worth a pound of cure.”This article was submitted as part of our Industry Insider program. Learn more >>
By Joshua Levin-Epstein, Attorney at Shiboleth LLP.
Joshua Levin-Epstein is Of Counsel to Shiboleth LLP's New York office. His practice focuses on hospitality and corporate restructuring. He can be reached at 212.792.0046 or via email at JoshuaL (at) shiboleth.com.