DRAFTING PLANNING MEMOS FOR LLC FORMATION CLIENTS

By , September 14, 2010 4:30 pm

I’ve spent much of the last 17 years forming LLCs for clients.  If there are two things I’ve learned from this experience, they are as follows: 

  • First, it’s indispensable that clients understand at least the basic rules that will govern their LLCs, and especially those concerning contributions, allocations, distributions, events of dissociation, buy-sells, fiduciary rights and duties, and dispute resolution.  If they don’t understand these rules, then once their LLC is formed, they can unsuspectingly step into a lot of holes.  And if they do, they’ll blame you.
  • Second, most clients hate to learn LLC rules by reading drafts of LLC operating agreements.  Even in relatively simple deals involving multi-member LLCs, these agreements, if they are well-drafted, are likely to be 30 or 40 pages long and replete with unavoidable technical terms.  Even for lawyers, reading 30- or 40- page agreements can be a real pain.  And even operating agreements for single-member LLCs should normally run to 10 or 15 pages.

But I think there’s a very effective way to address the dislike most clients have for the demanding process of reviewing drafts of operating agreements.  It’s what I call planning memos.  I highly recommend you consider the use of these memos.

Planning memos should normally do the following:

  • They should explain the purpose of the operating agreement in question.
  • They should explain in plain English key LLC terms and concepts such as “allocation,” “distribution,” “event of dissociation,” “fiduciary rule,” and “charging order protections.”
  • They should identify all of the LLC business organization law issues, the other legal issues and the federal and state tax issues likely to be important to your clients.
  • They should identify the main alternatives available to your clients for resolving each of these issues.
  • They should recommend the alternatives you believe to be best for your clients and should state the reasons for your belief.

Needless to say, while planning memos are much easier for most LLC formation clients to review and digest than operating agreements, writing them is often a hard job; it’s time-consuming; and it adds significantly to the legal fees your clients will have to pay you.  But I find that at least half of my LLC formation clients are willing to pay these extra fees; and in my experience, once they’ve read your memo, these clients are glad they paid you to write it.

Here’s a final major benefit of planning memos:  In addition to providing a useful tool for clients and earning you some deserved additional income, you’ll almost always find that the very process of drafting them helps you identify legal and tax issues you’d otherwise have overlooked.

One Response to “DRAFTING PLANNING MEMOS FOR LLC FORMATION CLIENTS”

  1. Great post John. I completely agree with you on the value of the Planning Memorandum. I tell the students in Business Planning and Lawyering Skills III about these documents and their utility, and I even send them to your treatise for examples and discussion. I have had them draft one on occasion in Business Planning. These are one of the many things that I tell them about that I also tell them fits in the category of “what I wish I had done more of in practice but didn’t!”

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