Court of Appeals Ruling emphasizes the importance of an Operating Agreement

A recent Marion County case demonstrates the importance of a well-written operating agreement for members of an Ohio limited liability company. On March 15, 2010, the Courts of Appeals in Marion County ruled monies contributed by one member of the corporation were really a loan and that an initial investment of $225,000 by the other party could later be subject to setoffs.

Thomas Bentley formed a company that built and operated storage facilities. Mark Freyhof rented a truck from Bentley and became interested in going into business with him. Shortly thereafter in July of 2003 the two entered into an operating agreement creating Southland Storage Facility, LLC.

It was agreed between the two that, in the event of a sale, Bentley would be repaid his initial investment of $225,000 before the members of the LLC began to receive profits. After the business operated for some time, the owners eventually ran in to trouble. Then, Freyoff sought a judicial dissolution of the company. Freyoff was appointed the Liquidating trustee, who wrapped up the affairs of the company. As is often the case in these situations, Bentley did not agree with the disbursement of funds.

Bentley claimed that some of his money should have been considered a contribution and not a loan. In that event, Bentley would have owned a larger percentage of the company and would have been permitted to have a larger profit distribution. However, the operating agreement said otherwise.

This case shows that a well-defined operating agreement is paramount when going in to business with another person. It is important that your intent is expressed in the agreement. The best way to resolve potential problems like these is to think of every possible situation that could go wrong, and have a provision for it written in the operating agreement. The most common way to achieve this is to have a qualified attorney draft the operating agreement for the LLC.

Crumpton Law LLC and its attorneys practice small business law in Columbus, Ohio, and throughout the surrounding counties and cities of Franklin County, Delaware County, Union County, Madison County, Pickaway County, Fairfield County, Licking County, Dublin, Powell, Lewis Center, Worthington, Westerville, New Albany, Gahanna, Bexley, Reynoldsburg, Canal Winchester, Grove City, Hilliard and Upper Arlington.

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