How Is A Business Dispute Handled When There Is No Operating Agreement?

 Posted on April 25, 2022 in Uncategorized

Starting or joining a business venture is an exciting endeavor. With the hustle and bustle of starting a business, owners may not put together a formal operating agreement. It may not seem necessary at the time, or it may seem too time-consuming or costly

But if a conflict arises, how is the business dispute handled if there is no operating agreement? Broadly speaking, the default terms of Wisconsin’s limited liability company act (LLC Act) governs anything not covered in an operating agreement. Below, we’ll talk about common business disputes, the default rules, and the purpose of an operating agreement.  

If you’re involved in a business dispute with no operating agreement in place, reach out to one of our experienced business litigation attorneys to understand your options and rights

What Are the Most Common Business Disputes for an LLC?

The beauty of a Wisconsin LLC is the flexibility it provides. More or less, an operating agreement allows owners to tailor an operating structure that works best for their business needs. Unfortunately, that flexibility can be a benefit and a burden. And even with an agreement in place, disputes might still arise.

Common business disputes involve:

1. Breach of verbal agreements;
2. Breach of fiduciary duties; and
3. Breach of written contracts. 

For example, business owners may accept a loan from an associate in exchange for an interest in the company. This is especially common with single-member or small LLCs. The members may ask friends to loan them money in exchange for a share of company profits. However, if this agreement is a hand-shake deal, it can lead to a business dispute down the road

What Is the Purpose of an Operating Agreement?

An operating agreement solidifies the internal structure and operating procedures of an LLC. In the agreement, the members (or managers) decide important issues such as:

• Who manages the LLC;
• What ethical duties do the members or managers have;
• Who gets to vote; and
• How voting works. 

Having an operating agreement protects the LLC from disputes and makes sure everyone is on the same page. Commonly, disputes arise because of a misunderstanding about someone’s roles, rights, and responsibilities in an LLC. An operating agreement may not prevent all disagreements, but it allows you and your associates to have a written document to rely on for internal operations

If you don’t have an operating agreement, now is the time to call us to protect yourself and your company. The seasoned lawyers at Mallery, s.c. can help give you peace of mind by setting up an agreement that works for your business

How Is a Business Dispute Handled When There Is No Operating Agreement?

Without an operating agreement, the courts typically look to the default rules in Wisconsin’s LLC Act. If the default rules don’t match how the LLC operates, you might be stuck with it. But not necessarily. If the business dispute turns into a lawsuit, the court may allow you to present evidence from business records to establish how your company routinely operates

For example, suppose the default rules require all members to vote “yes” before another member can make contributions to the LLC. Using company records, you may prove that, in practice, members can make contributions to the LLC without a vote. The court could then use that established practice to decide how to resolve the dispute at hand.

Statutory Default Operating Rules

Without an operating agreement, the default operating rules typically apply to the LLC. Yes, the court may allow you to present evidence of actual business practices, but that is the exception and not the rule. So what are the default rules? Let’s talk about them in turn

Who Manages the LLC By Default?

The members of the LLC manage the business’s affairs by default unless the Articles of Organization or operating agreement say otherwise

Typically, the Articles of Organization say whether the members or managers are responsible for managing the LLC. That said, the operating agreement can expand or restrict management responsibilities

What Ethical (Fiduciary) Duties Do Members Have?

By default, members and managers have a duty to deal fairly with the LLC. Additionally, they have a duty of loyalty, meaning they can’t use the LLC’s information or money to personally benefit themselves or another company. The Wisconsin LLC Act provides businesses with the ability to expand or scale back these ethical obligations

Who Gets to Vote?

It depends on who manages the LLC. If hired managers manage the company, then official business actions require a “yes” vote of more than 50% of the managers. If the members (owners) manage the company, business actions require a “yes” vote from members making up more than 50% of the total contributions to the LLC

Members are the default managers of the LLC if neither the Articles of Organization nor the operating agreement says otherwise.

In a Dispute With No Operating Agreement in Place? Let Us Help.

We pride ourselves on bringing top-level expertise to every business case. Our unmatched dedication allows us to use creative and proven strategies to help solve even the most complex business disputes. We understand the unique legal and operational issues business owners and employers face, and we can help. Call us today to schedule your initial consultation.