Welcome to networking Arizona with host Carol blonder. You’ll hear interviews with businesses located throughout the valley. Networking, it makes a difference.
Welcome to the show everyone, this is going to be super, super cool to show today. I’m really excited, all of my shows are cool, you wanna know I love my show so much and I say this a lot because I love the information that people get here. And it’s such a plethora of different things at any time. We’re live on Facebook. So I want to say hi to everybody out there like us and follow, we’ll share the show later on, put networking Arizona right into the little spacebar there. And you can actually watch us doing this show live right now here. It’s really fun to do. So you can check it out. My first guest has been on my show now several times. I have with me Richie Edwards, and he’s an attorney with FR Law Group. Welcome back to the show. First of all, I want to talk a little bit about FR Law Group, what they do, and what they’ve kind of brought to the business owners out there. Business people listen up, everybody, and not just but to everyone, even not just business people, I want to say that. But tell everybody a little bit about the firm and what they’ve done. And then what we’re going to talk about today.
Thanks, Carol, it’s great to be back again, we do the FR Law Group is a local law firm, we’re a smaller law firm that brings we think national experience and national expertise to small business owners, individuals in the valley, and more affordable price and more competitive price, we try to be reasonable in how we charge people so that everybody can take advantage of what you might get it the typical big law firm and big fancy white shoe places. And we do that through our partners’ experience in a wide breadth of things all over the country. And they brought that here to Phoenix. And we can help outside of Phoenix. But we’re really happy to do that and bring that here to the people of the valley. Today I’d like to talk about operating agreements. Yeah, in LLCs, small businesses, partnerships, solo entrepreneurs, and how the operating agreement is different from the Articles of Organization. And why it’s so important that every business no matter how small, no matter what they do, has an effective operating agreement to guide their work moving forward.
So listen up everyone, because a lot of people are solopreneurs, like me. And you looked at me and said, Well, I think you should have one too, Carol. And I was like oh my god. And then I mean, cuz you know, we don’t think about those kinds of things a lot of people don’t, especially when they start their own business. But then of course, we have people who are in business with partners, and go into business with someone. And that also now brings a whole nother you know, equation to this. So let’s talk a little bit about a solopreneur first, and then when we come back from the break, we can talk a little bit about more people that are in partnership with somebody. So somebody who is. Why does somebody let’s talk a little bit about why somebody who’s solo like me? Who would need that,
Right. So that’s perfect. And that’s the biggest thing, right? Somebody who solos like he says, What do I need an operating agreement for? I know what I want to do, and no one can fight me on it, I’m just going to do it. And that’s mostly true. But it’s not entirely true. So what the operating agreement does generally for any business, no matter how small for yourself and other solopreneurs is it guides and it lays out what the what we call the corporate formalities how the business has to run to be legal and to get its meet its goals meet its expectations. So in your case, the solopreneur, you might have a business that wants to do X, Y and Z, it wants to be treated in a certain tax filing, it wants to file taxes a certain way it wants to do certain things, you may want the business something to happen to the business in the event that that you no longer want to run it, you may want to pass it down in the event that a solopreneur passes away, they may want something to happen to the business. And if there’s no operating agreement, what happens unfortunately, is the business is at the whims of whatever Arizona law is in effect at that moment. And it could change from year to year. And you don’t get to decide what happens to your business in certain situations. And that can cause problems if you’re treating your business as if we were going to get a certain tax treatment. But your operating agreement doesn’t say that because you don’t have one. You don’t follow the correct corporate formalities. You could be in big trouble.
So let’s say something happened to me, which would be dreadful.
In the worst.
But, so let’s say something happened. And now it’s tax season, right? It’s coming up and they have to file taxes, you have to do all of that. People don’t realize that when you pass away, somebody’s gotta do that. If when you own a business, if it’s not done the way that you had intended it, it could cause a problem where let’s say you get audited or what could happen.
That’s exactly right. So in our example, it’s a little bit morbid. If you pass away and somebody has to do your business taxes for you following your death, what happens? Well, you have while you’re living, run your business a certain way, you’ve done certain things planning for tax filing, you know how you’re going to file taxes, what treatment you want to do, which forms you want to file, etc. Well, if it’s not written down in an operating agreement, if all the steps aren’t followed, according to the IRS and the other rules and regulations, then the accountant comes in, they don’t know what to do, they don’t know what you were planning, because it’s not written down. Nothing specific was followed, they have to take their best guess, if they guess wrong. And there’s some incongruencies, between what you’ve done, what the accountant files, and the business gets audited? Well, now, whoever your benefactors or heirs are, are having to pay penalties to back taxes, they’re having to go through the audit process, because it wasn’t done properly. And things didn’t match up. If you had an operating agreement, the account looks at that they follow it. Everything goes solidly and it ends up just how you always intended.
So incapacitated, let’s talk a little bit about that. I mean, cuz I just had I was sitting here thinking, Now, a lot of people know that when were they know to do it, they might not they put their heads in the sand with this probably a lot to where, you know, you have to have a power of attorney for that for medical power. Is there such a thing in this case, let’s say because you’re talking about passing away, which is the worst thing, right? What happens if something happens? You’re not you but your incapacity incapacitated? Is there, is that in a sense, your power of attorney?
Yes, it can take over the place of the power of attorney for the business, because what the operating agreement does is it tells the people in the business, so you if you’re solopreneur, and it tells the outside world who might be looking at that agreement, what the rules of the businesses how it’s going to operate. So if you’re incapacitated, the person who has to come in and take over your affairs for the time while you’re incapacitated. If they have the operating agreement, they can look at the operating agreement. And they can follow exactly what that says. It may say if I’m incapacitated, I want the business liquidated and sold and or I want XYZ person to run it. Right. I want John Smith down the road to run it. And I want him to do these things while he’s doing it. And the business continues to operate as you always intended. Even if you aren’t able to do it day to day you’re incapacitated, something happens. And then it’s there for you when you return right you’re ready to do it.
So why an attorney?
Well, the operating agreement, what happens? The people that go do it, you can Google one, you can Google operating agreement, you can grab one you can pull it off, it typically will have either provisions you don’t need that could cause the problem down the road, or it won’t contain everything that you actually want it to it will skip steps and it’s just very generic. The attorney will come in and will say this, what are your business goals and we’ll write an operating agreement to match that we won’t give you anything extra We won’t give you anything fluff and we won’t leave anything out that you actually need to achieve your goals.
Now you do free consultations. You also are right here located here in Phoenix, so help anyone anywhere. Their website is frlawgroup.com Their phone number is 602-566-7425. We’re gonna come back and we’re going to talk a little bit further about this because you know what, guys? A lot of people are in business and don’t have this.
I love talking to you because it’s so interesting. Obviously, I’m a business owner. And a lot of people that listen to this show happen to be as well because of the kind of station that this is. And we’ve been talking a little bit about solopreneurs and any operating agreements. And the thing is, is that we also want to talk now about a little bit more about people who are in partnership, because now that’s a whole nother ball game.
That’s exactly right. So I do think it’s important that everybody has an operating agreement no matter how small, solo or not, it becomes particularly important if you have more than one person in your business. And that’s because what people normally do, they go to their friend, John, hey, let’s start a business, John, you know, we want to sell T-shirts, we’re going to rent this space. These are our vendors. Here’s what we’re gonna do. We’re partners, we’re 5050. And they talk about these things they get online, they go to the corporation commission, they file the Articles of Organization for the LLC, and they start selling T-shirts. And they’ve had these verbal agreements. That doesn’t cut it, right, because what happens when John wants 60%, or John doesn’t want to put in for the next t-shirt order, or John wants to move and rent a bigger space. Or you would like to hire a new employee. And now you’re fighting and now the business can’t move forward. If you’re fighting right now, if you have the written operating agreement that says this is how we make decisions when we want to buy more things. If we’re deadlocked, this is the process, this is how we break ties, this is who gets to break the tie in certain situations, maybe I get to break the tie for real estate transactions. And John gets to do it for employees, whatever the case may be, but it allows our business to keep functioning. And what I think it does is it really helps maintain the relationship. It’s awkward right at the beginning. Okay, let’s get all these things down. What happens if you try to back out on me? What happens if I try to back out on you, but then it’s on paper, and everyone just has to follow what’s on paper, we just say, hey, we wrote it down, we signed it, we have to follow it. And you and I don’t have to fight as partners on what we’re going to do and who messes with who is right.
And having an attorney who does that for you also, especially if you’re going to have it you know, two people are involved or more. You’re the mediator too. And I’m sure when you sit down and do all of that not only do you know all the things to talk about because you said that you really get to know the business, you get to know them and find out what their needs are and what they’re looking to do and their goals are. And then you know what, that’s when you’re sitting there, of course, you’re perfect to be able to say hey, listen, guys, let’s figure this out. Right.
right. Perfect. I am like that. No, it’s not. But you’re exactly right that in that situation, you come to us, you and your partner, our firm represents the business. And so our purpose as the attorney of the business is to advocate for the businesses best interests and put the business in the best position. We think that’s going to put you and your partner in the best position. But we advocate for the business. So we sat there in the room. What do you want to do in the operating agreement? What are the pros and cons of what John wants to do? What do you want to do, Richie? And where do we get in the middle? So we’re in the best place and we can go forward because we represent the business. We want the best business to succeed. We want you to send us more work in the future, right? And if we do it properly, everything’s going to go smoothly.
You also said at the break, we do things well and when you do do things well, down the line it may not be right away, but down the line, you might need an attorney for something and they come to you, right. And the other thing that you said is that you do what’s called outside counsel, is that what you call that? And so explain that,
Right. So our philosophy at the beginning, if someone comes to us, we want to get it done as efficiently. And as quickly and with as little cost as possible, because we believe, Sure, we could bill you for three or four or five extra hours this month, but we might not earn your business. And if we do a really good job, and we’re affordable today, that you want to come to us tomorrow, and next year, and the year after that with further business. And so that’s how we operate when we first get to know you. And then the outside counsel services as we offer sort of a bigger business, right, they have a general counsel, an attorney who’s on staff gets a salary and deals with their legal problems. Most smaller businesses don’t have that and most medium sized businesses don’t have that. And we act as that person, you don’t have to put us on salary. You pay us when we do work, when you need us, you come to us and we do it, you don’t need us three, four or five months in a row. No big deal will always be there when you do and you can go to someone as soon as a problem happens. Instead of having to find and hire a new attorney.
There, do free consultations. And I always say put the number on the phone. Because you know what you never know, especially right now, I think it’s so important. Down the line for most people, when we’re talking about all these things, obviously, when you’re in a partnership, first of all, just to keep everybody copacetic. And you know, doing it this way in the beginning, but also we’re going to talk about tax ramifications. If you don’t do things right, we’re going to talk about that. And getting things done ahead of time not waiting till all of a sudden something happened or oh my god, this is when you want to do it now. So the number to call us is 602-566-7425. Their website is frlawgroup.com. They’re right here in Phoenix, but they can help anyone nationwide. And they are like the big guns, but they keep it down so that it’s you, anybody it’s affordable and more so than anything is that so that anybody can use it. But they have that mentality to help you in that way. And that’s kind of nice. Now, with partnerships, okay, we’re going to talk a little bit about, oh, this is really important how they are one person or how they should be fiduciaries as we’re mentioning.
Right, so, when people get into an L typically apart when someone enters we’re calling it a partnership here, but most people will file and start an LLC, and it’ll be treated like a partnership. They’re partners in the LLC, and we’ll go from there. Well, members of an LLC, they don’t have what’s called a fiduciary duty to the business and a fiduciary duty means if you hire me as your attorney, I have a legal and ethical obligation to act in your best interest, even if it’s not best for me, members of an LLC don’t have that they can act and whatever best for them, even if it hurts the business, right? If it competes with the business, if it makes the business lose money, they’re allowed to do that, unless you have an operating agreement that says otherwise. So when the operating agreement, you’d put in what we call restrictive covenants, and you would say, as members of this LLC, we’re not allowed to take actions and intentionally harm the LLC, we have to put the interests of the LLC above our own, you know, we’re not allowed to start a competing business, we’re not allowed to sell off the assets. We’re not allowed to send customers to other businesses, all these sorts of things that keep it running where maybe someone in the LLC likes the idea to start, but they get another outside opportunity without the operating agreement, they could turn their attention to that it causes your partnership, your LLC to flounder, and there’s nothing you can do about it.
When you’re talking about these operating agreements just in this does it matter what kind of business it is for you all? Do you work with anybody?
We do. We work with anybody, Don’t we? Primarily I reference LLC, most because it’s just what most people choose to do. It’s, I think, for most situations, probably the best thing that people can do, and that’s dependent on each case specific and we can go through that. But yes, the operating agreement, solo LLC Corporation, anybody business, you need an operating agreement, you really do, I think so.
Now a deadlock. What is that?
Okay, and that comes up to two people or four people in the LLC. And let’s say you want to expand, you want to hire new employees, and you have two people, one wants to hire, one doesn’t and you can’t move forward. Unless you both agree, typically, because you need the majority and then a 50:50 split, you can’t get a majority. Well, if the operating agreement says okay, if we run into a deadlock voting situation, we’re 50:50. If it’s about employment, then John gets to break the tie. He gets to choose as long as he’s considering the best interest of the business, how it’s going to go. If we’re talking about vendors and sales, then Richie gets to break the agreement. And that can be however you want it to do. You can say that you have to go to a mediator and the mediator gets to choose what’s best for the business, however you want to do it. But what it does is it allows the business to move forward, we often see a business come in, and they’re deadlocked. They can’t move, they can’t grow their business, they can’t continue to operate because they disagree with each other. And the operating agreement, there isn’t one. So it doesn’t tell them what to do. If it’s there, well, maybe one person’s a little upset about how it turned out. But according to the paper, we can move along. And we can get past that as long as we can keep going forward.
Now, there’s also something that’s huge here, because when you’re in partnership with somebody, and you want to sell it your business. Now, this is where this comes in big time. Especially in the tax area.
Yeah, that’s exactly right. If you and I are in business together, maybe I want to get out. And my friend John wants to buy in, you don’t know, John, you probably don’t want to work with him, right? Well, I can sell my portion to him. Unless the operating agreement says I can’t, right. And so you want the operating agreement to say, Well, if he wants to sell, I get first chance to buy, I have to approve his buyer. You know, he’s not allowed to sell, we just have to close the business maybe. And then he wanted to say how the sale is going to be treated for tax purposes, right? Is it going to be a transfer of assets? Is it going to be a debt purchase, is it going to be a cash sale just for the distributions and the membership interest. And that can have a big impact not only on the person selling it, but on the person who remains in the business, the person buying it, and how the business operates, then moving forward, depending on the sale being transacted, depending on how it’s taxed, etc. So somebody can really leave you in a bind if they decide to leave your business, if you’re not protected by the operating agreement.
And I bet you anything. There’s a lot of people that just close they don’t even know that they could have done certain things. Am I, do you find that?
Yeah, I do. I find that people aren’t, aren’t aware that there were different options that they could get a better treatment, that they had three options, they just only knew of one, maybe their friend took that option two years ago. So they told them and they went ahead and did that. And they really put themselves in a disadvantageous situation when they could have been much better off. Right. And, and that’s okay, we’d like people to come to us early. We think it’s best. But if you come to us late, we can still help you out then. Right?
Absolutely. I think this is the thing that we’ve talked about a lot with FR Law Group, which is it’s all about doing things, you know, before anything happens, right. You know, there’s contracts to look at this right now, we’ve been talking a little bit about businesses having an operating agreement, and anyone who didn’t hear the first part of it solopreneurs need them as well. Yeah. And so is what would be your final words for everybody out there today.
My final words is if you spend the money on two or three hours for our firm, we can save you thousands of dollars going forward, and we can make sure that your business does exactly what you want it to all the way into the future. And we can do that efficiently, effectively and affordably.
And you know what, they do a good job and when they do a good job, then you’re going to want to come back to them. And that’s what they say, so their phone number is 602-566-7425. It’s frlawgroup.com.