Avoiding probate doesn’t always have to be complicated. You can take simple steps to ensure that certain types of property pass to your heirs without going to probate court. One of the easiest methods is to designate beneficiaries to inherit your bank accounts, retirement accounts, securities, vehicles, and real estate automatically, without probate.

 Payable-on-Death Bank Accounts

Payable-on-death bank accounts offer one of the easiest ways to keep money — even large sums of it — out of probate. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death.

As long as you are alive, the person you named to inherit the money in a payable-on-death (POD) account has no rights to it. You can spend the money, name a different beneficiary, or close the account.

At your death, the beneficiary just goes to the bank, shows proof of the death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.

If you and your spouse have a joint account, when the first spouse dies, the funds in the account will probably become the property of the survivor, without probate. If you add a POD designation, it will take effect only when the second spouse dies.

Retirement Accounts

When you open a retirement plan account such as an IRA or 401(k), the forms you fill out will ask you to name a beneficiary for the account. After your death, whatever funds are left in the account will not have to go through probate; the beneficiary you named can claim the money directly from the account custodian. Surviving spouses have more options when it comes to withdrawing the money, than do other beneficiaries.

If you’re single, you’re free to choose whomever you want as the beneficiary. If you’re married, your spouse may have rights to some or all of the money.

  Transfer-on-Death Securities Registration

Almost every state has adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. It works very much like a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what’s called “beneficiary form.” When the papers that show your ownership are issued, they will also show the name of your beneficiary.

After you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. But after your death, the beneficiary can claim the securities without probate, simply by providing proof of death and some identification to the broker or transfer agent. (A transfer agent is a business that is authorized by a corporation to transfer ownership of its stock from one person to another.)

Transfer-on-Death Registration for Vehicles

Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Indiana, Kansas, Missouri, Nebraska, Nevada, Ohio, Vermont, and Virginia offer car owners the sensible option of naming a beneficiary, right on their certificate of registration, to inherit a vehicle. If you do this, the beneficiary you name has no rights as long as you are alive. You are free to sell or give away the car, or name someone else as the beneficiary.

To name a transfer-on-death beneficiary, you’ll need to fill out the paperwork required by your state’s motor vehicles department.

Transfer-on-Death Deeds for Real Estate

In some states, you can prepare a deed now but have it take effect only at your death. These transfer-on-death deeds must be prepared, signed, notarized and recorded (filed in the county land records office) just like a regular deed. But unlike a regular deed, you can revoke a transfer-on-death deed. The deed must expressly state that it does not take effect until death.

States that allow TOD deeds are Alaska, Arizona, Arkansas, California (effective January 1, 2016), Colorado, District of Columbia, Hawaii, Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business


Hiring a high-level employee or executive is a big step for most small businesses. The consequences of making the right hire are much greater with an executive than with most other employees. This hire involves a much bigger financial commitment on your part than hiring rank-and-file employees in terms of salary, benefits, and perhaps even an equity stake in the company. Your hope, of course, is that the experience and expertise the executive brings will result in greater sales and more opportunities for business growth, thus paying for the financial commitment many times over.

Because the stakes of such hires are so high, small business owners should create a formal, written employment contract that dictates the specific terms of your employment agreement with the executive. This will provide protection for both you and the new hire. An employment contract will help ensure, for example, that the executive doesn’t leave your company and take valuable proprietary information to a competitor. And by spelling out the specific conditions under which the executive can and cannot be terminated, the contract provides a higher degree of job security for him or her.

An executive employment contract typically includes, at the very least, the following components:

  • Duration of Employment: In most states, if an employee is hired without an employment contract that stipulates the duration of employment, he or she is considered to be employed “at will.” This basically means that either the employer or employee can terminate the employment for any legal (i.e., nondiscriminatory) reason at any time. By including a specific time duration of employment, the contract gives both sides an “out” if the arrangement isn’t going as expected. Given the higher stakes involved in an executive hire, this is often welcomed by both sides. However, the contract can include an at-will clause stating that the employment term is open-ended if both sides prefer this kind of arrangement.
  • Compensation Details: Compensation packages for executives are often more complicated than those for rank-and-file employees. Not only do they include a base salary but they may include stock options, incentive compensation plans, specially designed retirement plans, and other perks such as a company vehicle or a country club membership. Given this complexity, it’s usually a good idea to put all of this in writing in a formal employment contract. Also include any specific benchmarks or performance levels that must be met for the executive to qualify to receive such compensation if applicable.
  • Severance Package: To attract top executives, you may have to agree to pay them a certain amount of money or equity in the business or provide certain benefits for an extended period of time after they leave the company. The terms of any agreed upon severance package should be spelled out in detail in the employment contract, including the specific circumstances of employment termination that will and will not trigger the severance.
  • Restrictive Covenants: Also known as Non-Compete agreements and Proprietary Rights agreements, these could be your primary protection both against an executive leaving your business and taking proprietary information or trade secrets to one of your competitors, and/or starting a business to compete with yours. Most non-compete agreements dictate that the executive cannot go to work for a competitor or start a competing business within a certain time period (such as one year) after leaving your company. The legalities of defining a “competing” business can get tricky, and courts tend to be unpredictable in how they rule in such cases. Various state laws also affect the outcome of non-compete enforceability. Regardless, including at the very least, restrictive covenants in your employment contract, will make executives think twice before jumping ship and taking proprietary information to a competitor.
Contribution by:  Don Sadler

WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business


When it comes to understanding trusts, knowing the difference between revocable and irrevocable trusts is crucial. If you ask for a revocable trust and get an irrevocable one, or vice versa, the legal and tax consequences will be significant.

Revocable Living Trusts

A revocable living trust, also known as a revocable trust, living trust or inter vivos trust, is simply a type of trust that can be changed at any time.

In other words, if you have second thoughts about a provision in the trust or change your mind about who should be a beneficiary or trustee of the trust, then you can modify the terms of the trust through what is called a trust amendment. Or, if you decide that you don’t like anything about the trust at all, then you can either revoke the entire agreement or change the entire contents through a trust amendment and restatement.

Since revocable living trusts are so flexible, why aren’t all trusts revocable? Because the downside to a revocable trust is that assets funded into the trust will still be considered your own personal assets for creditor and estate tax purposes. This means that a revocable trust offers no creditor protection if you are sued, all of the trust assets will be considered yours for Medicaid planning purposes, and all assets held in the name of the trust at the time of your death will be subject to both state estate taxes and federal estate taxes and state inheritance taxes.

So why should you use a revocable living trust as part of your estate plan?

  1. To plan for mental disability – Assets held in the name of a Revocable Living Trust at the time a person becomes mentally incapacitated can be managed by their disability trustee instead of by a court-supervised guardian or conservator.
  2. To avoid probate – Assets held in the name of a Revocable Living Trust at the time of a person’s death will pass directly to the beneficiaries named in the trust agreement and outside of the probate process.
  3. To protect the privacy of your property and beneficiaries after you die – By avoiding probate with a revocable living trust, your trust agreement will remain a private document and avoid becoming a public record for all the world to see and read. This will keep the details about your assets and who you have decided to leave your estate to a private family matter. Contrast this with a last will and testament that has been admitted to probate – it becomes a public court record that anyone can see and read.

Irrevocable Trusts

An irrevocable trust is simply a type of trust that can’t be changed after the agreement has been signed, or a revocable trust that by its design becomes irrevocable after the Trustmaker dies or after some other specific point in time.  However, refer to Can an Irrevocable Trust Be Changed? for more information about certain situations in which an irrevocable trust may be changed.

With the typical revocable living trust, it will become irrevocable when the Trust-maker dies and can be designed to break into separate irrevocable trusts for the benefit of a surviving spouse, such as with the use of AB Trusts or ABC Trusts, or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries.

Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals:

  • Estate Tax Reduction

Irrevocable trusts, such as irrevocable life insurance trusts, are commonly used to remove the value of property from a person’s estate so that the property can’t be taxed when the person dies. In other words, the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets. Thus, if the person no longer owns the assets, then they can’t be taxed when the person later dies.

As mentioned above, AB trusts that are created for the benefit of a surviving spouse are irrevocable and, thus, can make full use of the deceased spouse’s exemption from estate taxes through the funding of the B trust with property valued at or below the estate tax exemption. Then, if the value of the deceased spouse’s estate exceeds the estate tax exemption, the A Trust will be funded for the benefit of the surviving spouse and payment of estate taxes will be deferred until after the surviving spouse dies.

ABC trusts can be used by married couples who live in a state that collects a state estate tax and the state estate tax exemption is less than the federal estate tax exemption. For example, in Massachusetts the state estate tax exemption is only $1 million, as compared with the current federal $5.34 million exemption, so in Massachusetts the first $1 million will go into the B Trust, then next $4.34 million will go into the C trust, and anything over $5.34 million will go into the A Trust.

  • Asset Protection

Another common use for an irrevocable trust is to provide asset protection for the Trust-maker and the Trust-maker’s family. This works in the same way that an irrevocable trust can be used to reduce estate taxes – by placing assets into an irrevocable trust, the Trust-maker is giving up complete control over, and access to, the trust assets and, therefore, the trust assets cannot be reached by a creditor of the Trust-maker or an available resource for Medicaid planning. However, the Trust-maker’s family can be the beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors. There are also irrevocable trusts called self-settled trusts or domestic asset protection trusts that in some states, including Alaska, Delaware, Nevada, and Tennessee, offer creditor protection and allow the Trust-maker to be a trust beneficiary.

In addition, as mentioned above, the various irrevocable trusts that can be created for the benefit of the Trust-maker’s surviving spouse or other beneficiaries after the Trust-maker of a Revocable Living Trust dies can be designed to offer asset protection for the trust beneficiaries.

  • Charitable Estate Planning

Another common use of an irrevocable trust is to accomplish charitable estate planning, such as through a charitable remainder trust or a charitable lead trust. If the Trust-maker makes the initial transfer of assets into a charitable trust while still alive, then the Trust-maker will receive a charitable income tax deduction in the year of the transfer is made. Or, if the initial transfer of assets into a charitable trust doesn’t occur until after the Trust-maker’s death, then the Trust-maker’s estate will receive a charitable estate tax deduction.








When you start a business, how do you choose the location? The answer depends on your type of business, your customer base and how you sell. For some types of businesses, such as retail stores or restaurants, you need a physical location located where most of your customers are. For others, such as service businesses or ecommerce companies, your physical location is less important, and you have more flexibility in your choice. Here are some factors to consider when choosing your location.

What does your business do? Do you need space to manufacture, store, package and ship products? Then you may need an industrial space. Is most of your work “knowledge work,” such as consulting, which takes place on a computer? Then you can work from just about anywhere.

Where are your customers located? If you plan to sell your products or services online, it doesn’t matter where your customers live since they can buy from you wherever they are. On the other hand, if customers must physically visit your location, this can rule out options such as working from home, since many zoning ordinances prohibit home-based businesses that attract too much traffic.

What materials, vendors or suppliers will you require? Do you need to be physically close to sources of product, or to key vendors? For example, if you need materials to produce a product, the cost of shipping them to your location can be prohibitive if you’re located too far away from your sources.

What’s your budget? If you’re on a shoestring budget, lower-cost options such as working from home, sharing office space or subleasing space from another business. or renting a spot in a co-working space could help you save money.

Will you have employees? If you plan to hire employees, you’ll need space to put them, which will require some type of commercial location. You’ll want a space that is configured appropriately for the layout you need, is handicapped-accessible so you don’t get into trouble with local zoning authorities, and requires minimal if any modifications before you move in.

What type of infrastructure do you need? When choosing your location, keep in mind factors such as Internet access, electrical and telecommunications services. For example, some older buildings aren’t adequately wired to handle the needs of a high-tech company. Along the same lines, your home may not have the Internet access speeds you need to run a home-based business effectively.

What’s on the outside? Don’t forget to assess the exterior of any location you are considering. Who are the neighboring tenants, and are they complementary to or competitive with your business? Is there enough parking for employees and/or customers? Is the location near major highways and/or public transportation so employees and customers can get there easily, and if you need foot traffic, is there plenty of it? Are the common areas well maintained and up-to-date?






A spendthrift trust is a kind of trust that limits or altogether prevents a beneficiary from being able to transfer or assign his interest in the income or the principal of the trust.  Spendthrift trusts are sometimes used to provide for beneficiaries who are incompetent or unable to take care of their financial affairs.

If a trust incorporates a spendthrift clause, the beneficiary is precluded from transferring his interest in either income or principal. Accordingly, the beneficiary’s creditors will not be able to reach the beneficiary’s interest in the trust.

The protection of the spendthrift trust extends solely to the property that is in the trust. Once the property has been distributed to the beneficiary that property can be reached by a creditor, except to the extent the distributed property is used to support a beneficiary. If a trust calls for a distribution to the beneficiary, but the beneficiary refuses such distribution and elects to retain property in the trust, the spendthrift protection of the trust ceases with respect to that distribution and therefore the beneficiary’s creditors can now reach trust assets.

A trust is called “discretionary” on the other hand, when the trustee has discretion (as to the time, amount and the identity of the beneficiary) in making distributions. Because the trustee is not required to make any distribution to any specific beneficiary, or may choose when and how much to distribute, a beneficiary of a discretionary trust may have such a tenuous interest in the trust so as not to constitute a property right at all. If the beneficiary indeed has no property right, there is nothing for a creditor to pursue. The statutes that follow this line of reasoning essentially provide that a trustee cannot be compelled to pay a beneficiary’s creditor if the trustee has discretion in making distributions of income and principal to begin with.

If the trustee of a self-settled trust (where the creator of the trust is also a beneficiary of the trust), has any discretion in making distributions, then the creditors of the settlor (creator) may reach the maximum amount that the trustee may distribute in his discretion to that particular settlor-beneficiary.

Consequently, when a trust is self-settled, to obtain any asset protection for the settlor, discretionary powers should be avoided in favor of a more desirable standard, emphasizing the fact that the trustee “may” exercise his discretion in designated allowable types of distributions, but only if he/she so chooses.





  1. Identify your content needs.

In order to hire great content creators not to mention put together the kind of contract we’ll discuss shortly, you have to first define what types of content you need.

For example, you could include:

  • Weekly blog posts
  • Social media updates
  • Guest blogging
  • Email marketing
  • Pay-per-click ad copyrighting

Identifying the specific types of content needed may not appear to be a legal step. However, at the outset, these are incredibly important things to consider, all of which will enable you to outline both your job advertisement and various aspects of your contractual agreement.

  1. Assign copyright.

The act of simply paying someone does not automatically turn over copyright of that content to the end user. Unless you specifically list the terms of use in your contract, the content creator maintains ownership of that content. In this case, you only have an implied license, therefore, you’ll need express permission to re-purpose any of that content for other things, such as turning a blog post into an eBook or social-media posts.

It’s also important that you consider protection against indemnification for images or content that may be the property of others. At the end of the day, you will be responsible if the content published on your site or in your materials is found to breach copyright law.

For text-based copy, using a service is standard practice. But with image attribution, this is particularly difficult, since there’s no good way to test the copyright short of either buying the rights or waiting for an angry digital millennium copyright act notice from the infringed-upon owner.

             3. Clearly outline outsourcing requirements.

Be as specific as possible when outlining requirements so that freelancers know your expectations, including bench-marking and measuring success or failure. You may also want to include a Service Level Agreement that clearly outlines performance details and standards.

  1. Consider legal liabilities in your content.

You may need to take further precautions if the content you’ll be outsourcing is subject to any regulatory requirements. For instance, if you’re publishing medical content or financial advice, you may need to include relevant disclaimers or ensure materials produced meet certain standards to protect yourself legally.

If the content you publish on your website is something you could be held legally liable for, be sure your outsourced creators are able to meet any necessary requirements.

  1. Preparing in advance for termination.

Ideally, you’ll find in a freelancer a long-term partnership for your content creation needs. But since turnover is inevitable, it’s far better to protect yourself up front. Your termination clause is hugely important, as it sets forth the conditions under which the customer may exit the outsourcing relationship.

The termination clause needs to outline the common reasons that give rights to you and your company to exit the clause along with the rights of the contractor. It’s also wise to include both party’s respective rights upon termination with regards to ongoing privacy and protection as well.

  1. Put it all in a contract.

Once you’ve covered all your legal bases, document them in a formal written contract that both you and your freelancers will sign. In most cases, it’s a good idea to consult with an actual lawyer to do this.

  1. Take out an insurance policy.

Last, it’s definitely worth investing in an insurance policy when it comes to protecting your legal rights as a content creator and purchaser. At the end of the day, you need to be prepared for any legal ramifications that could occur from the content you publish, or, at the very least, be fully aware of who’s liable for anything that may occur.

Though the Internet has blurred the rules and lines concerning outsourcing, it’s best to stick to guidelines and follow the rules to protect yourself. If you have any doubts, always consult a lawyer.


wfb_legal_consulting_inc_largeThere are numerous issues important to Business Buyers or Business Sellers or both. Generally, Sellers are interested in:

● Sellers want to be that they will be paid, especially if payment of the purchase price is deferred.
● Sellers want to avoid the possibility that a Buyer will later make a claim because the business fails to meet a Buyer’s expectation.
● Sellers are often concerned about continuing liability to former customers, employees and vendors, and in the case of the sub-leasing the business location they often remain liable to the landlord until the expiration of the lease term.
● Sellers are often required to respond to Buyers’ due diligence requests that can be very burdensome with serious legal significance.

Generally, Buyers are interested in:

● Buyer’s usually want to avoid the Seller’s prior vendor, customer, employee and tax liabilities.
● Buyer’s want to be sure that they get what they are paying for.
● Buyers want to be sure that the Seller does not start competing for the same customers or use technologies and information that were part of the transaction
● When the location is important Buyers want to be sure that the commercial lease provides them the duration they require.
● Buyers want to be sure that key employees intend to stay with the business and/or if they leave, it is not a situation where they are capable of taking important customers with them. (Note that key employees who are not owners may in California compete against their former employer.
● Buyers may require assistance with respect to financing.

Other Considerations:

● if you are buying into an existing business or merging your business with another you will want to have investigated what the other party understands your role to be and how someone will share control over a business that they formerly ran themselves.
● If you are buying a Franchise you will likely be required to be approved by the Franchiser and sign an agreement with the Franchisor.· A Bulk Sale escrow is the purchase of the business assets but not the business.
● Sometimes when you sell your business an equally if not more important part of the transaction is your continuing relationship with the new owner as an employee or consultant.
● When there is a business broker involved in the transaction, especially when the broker is giving advice to both the Buyer and the Seller you may find yourself under pressure to finalize the transaction too quickly

When you are buying a Business there are usually related legal needs as well:

● Forming an Entity
● Commercial Lease
● Employees and Independent Contractors
● Standard Terms and Conditions
● Contracts and Agreement
● Trademarks and other intellectual property

Once you’ve agreed to purchase a business, you’ll need to formalize that agreement. This is typically done using a purchase agreement, which is a legal contract that outlines the details of the sale. (This may also be known as a business purchase agreement, asset purchase agreement, stock purchase agreement or something similar depending on the exact nature of the sale.) Attorneys for both the buyer and seller should work together to draw up the purchase agreement to ensure that it is fair to both parties.
The purchase agreement typically includes:

• Purchase price and method of payment
• Terms and conditions of the sale
• Representations and warranties of the seller
• Representations and warranties of the buyer
• Actions the seller has agreed to take prior to the sale (such as paying off existing loans or securing the resignation of employees who will not be employed by the new owner)
• Details of the business to be purchased, including a list of all assets, inventory, contracts and equipment
• A list of all existing creditors who are to be paid off with the proceeds of the purchase
• How much commission is owed to a business broker (if one was used) and who is responsible for paying that broker’s commission
• An agreement to resolve any disputes arising from the sale in a specific court of law or with a specific arbitration company
• Additional relevant documents known as exhibits and amendments

The exhibits may include items such as:

• Bill of sale
• A set of corporate documents including leases, financial statements, tax returns, accounts receivable and payable, articles of incorporation, bylaws and minutes
• An agreement that the seller will act as a consultant to the business, remain as an employee or agree not to compete with the business or operate in a particular territory for a certain period of time
• An escrow agreement, detailing the responsibilities of the escrow agent, if the purchase money is being held in escrow for a certain period of time
• Property deeds if the business owns real estate
• A promissory note if the buyer is paying the purchase price in more than one installment or paying the entire purchase price at a later date
• Assignment of leases and the landlord’s consent to the lease assignment

Questions for Your Attorney

An attorney who has experience working with business sellers and purchasers can help guide the process of creating a purchase agreement, and should give you peace of mind in knowing that no detail has been overlooked.
Among the questions to consider asking your attorney:

• Have you previously written purchase agreements?
• What red flags should I be aware of?
• How much do you charge for your services?



So far, courts that have considered this question have ruled against employees. Your legal right to use medical marijuana protects you from criminal prosecution, but not from employer drug testing programs. If you were taking a different legally prescribed drug for your condition, you would most likely be protected by the Americans with Disabilities Act (ADA). However, this protection hasn’t been extended to medical marijuana.

The ADA prohibits discrimination against employees with disabilities. A disability is a physical or mental impairment that substantially limits a person’s major life activities, including major bodily functions. There may be people with glaucoma who do not have a disability under the ADA, based on this definition. However, if your glaucoma substantially limits your ability to see (a major life activity), you are protected.

Employees with disabilities have a right to reasonable accommodation to allow them to do their jobs. This extends to the measures an employee uses to control and function with a disability. For example, an employer might have to lower a desktop to accommodate an employee’s wheelchair. The same rule applies to drugs that are legally prescribed for a disability. The employer may have a legal duty to accommodate the employee’s drug use, including the side effects that the drugs have on the employee, under the ADA. If, for example, an employee takes medication for depression that makes him or her drowsy in the morning, the employer may have to alter the employee’s start time to accommodate that side effect.

But medical marijuana hasn’t been treated this way, at least so far. Courts have held that a person’s right to use marijuana for certain medical conditions doesn’t extend to a right to have that use accommodated by an employer. Marijuana use remains illegal under federal law, and the ADA explicitly does not protect employees who use illegal drugs. This lack of consistency between federal and state laws has led to the unfortunate result that an employee can be fired just for following doctor’s orders.




A valuable tool for protecting IRA assets as a component of estate planning is the use of a trust as an IRA beneficiary. These “see-through” trusts can provide valuable flexibility in a comprehensive estate plan, but also carry both income tax consequences and very strict IRS requirements for qualification. Estate planning counsel must know the detailed IRS rules in drafting these “see-through” trusts to meet requirements for Required Minimum Distributions (RMDs) and income accumulation.

IRA beneficiary trusts generally come in two types: “conduit trusts,” and “accumulation trusts.” Conduit trusts are marked by specific requirements as to how to calculate required minimum distributions over the lifetime of specified beneficiaries. It is important to note that IRA beneficiary trusts are drafted as trusts (whether QTIP trusts or any other) valid under state law, but contain specific language and provisions that qualify the trust for see-through treatment.
Whether estate counsel is drafting a trust to function as a conduit trust or an accumulation trust, estate planning counsel must know the rules and required language in drafting an IRA beneficiary trust in order to avoid serious tax consequences.

Be sure to visit: https://wfblegalconsulting.com/blog-2/articles/ to review other important topics in the business-related areas of Employment Law; Asset Protection; and Estate Planning.


Contribution by: Jarom Bergeson

Perhaps no other innovation is as indicative of America’s particular devotion to (and knack for) creative capitalism as the limited liability company (“LLC”). Born in America’s smallest state (Wyoming) in 1977, the LLC combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protections of a corporation.

This unique combination of liability protection and pass-through taxation explains why the LLC was quickly adopted in all 50 states, and why it is easily America’s most popular corporate form today. In 2012, more than 2.2 million LLCs filed partnership tax returns, and current estimates are that 55% of LLCs are single-member entities that file no tax returns at all, which means that there are probably somewhere in the neighborhood of 5 million LLCs in existence in America today. Approximately 3,000 new LLCs are created each month … in Utah alone (our home-office state and one of the best LLC laws in the country!).

The big mistake!! Another reason why LLCs are so popular is that they are easy to form, however, this can also be their downfall. Unfortunately, there are thousands of entrepreneurs who believe hitting “submit” and receiving back stamped Articles of Organization from the state completes the formation of the LLC.

In most states an LLC can be established by clicking through a government website and paying a filing fee. Technically, that puts the LLC on the ‘radar’ of the State. However, smart business owners and investors know this is really where the formation process begins.

Every LLC, whether it has one member, five members, or 100 members, should have an Operating Agreement and there are several important reasons why.

First, the Operating Agreement establishes the asset protection veil and the ‘formality’ of signing the Operating Agreement and the initial minutes is critical to show a court and a plaintiff that you took the LLC formation seriously.

Second, is the fact that your LLC Operating Agreement is your chance to write the “law” for your LLC. This is why the LLC is such a great choice for partnerships. The Operating Agreement gives partners the ability to delineate roles, rights, and responsibilities for the LLC owners, and to make specific plans for what happens if a partner dies, becomes incapacitated, or gets divorced.

What happens if you don’t have an Operating Agreement? Well, in their wisdom, the various state legislatures have planned for this, and each state LLC statute provides a set of “default rules” for how LLCs are to be governed if and when the LLC owners don’t take the time or effort to make those decisions for themselves.

However, as with most statutory language, these default rules can be difficult to decipher. In addition, the rules can and do change when the LLC statutes are amended, and all 50 states have different rules within the same framework. To boot, sometimes a state’s particular default rules just don’t make sense.

To illustrate, Utah adopted a new LLC statute in 2013. This statute becomes fully operational, applying to all existing and newly-formed LLCs, on January 1, 2016. While I’m sure the legislature and the governor had good intentions in passing the law, it certainly contains some provisions that create surprising outcomes.

For example, the new statute says: “A manager may be removed at any time by the consent of a majority of the members without notice or cause” (U.C.A. §48-3a-407(3)(d)). It does not say “a majority of the ownership” or “a majority of the profits interests.” This means that in an LLC with three owners, where one owner is the manager and owns 90% of the company, and the other two owners each own 5% of the company, the two 5% owners can get together and vote out the 90% owner as manager … as long as the LLC has no Operating Agreement and the statutory default rules apply. If the LLC does have an Operating Agreement, then the provisions of the Operating Agreement trump the default rules from the statute.

The moral of the story is that if you don’t want your LLC to be subject to potentially odd default rules that can be adopted and changed at the whim of state legislators who have never owned or run their own business, then your LLC needs an Operating Agreement and you need to know what that Operating Agreement says.

Do not create an LLC that does not have an Operating Agreement, and if you have already made that mistake, fix it by having one drafted and adopting it retroactively to the date your LLC was established.