Articles of Confederation: A lesson for LLC Operating Agreement drafting

As we all wind down this week after celebrating July 4th I thought it appropriate to talk about a little known and less talked about piece of US history: the Articles of Confederation, 1781-1789.

In the heat of the battle of the American Revolution, the Second Continental Congress created the Articles of Confederation which came into force in 1781. By design this governing document gave little authority to the central government, referring to the relationship of the states as "a league of friendship". But the US continued to grow and with it so did the problems, well beyond the scope a poor central government could control.

Some of the issues created by this war time document was the need for unanimous consent for any modification, absolutely no taxation power (the government could 'ask' for money), and an inability to compel members of Congress to attend Congress.

The controls were so weak the states convened in 1787 to change the relationship, eventually deciding to start anew. What came out of that meeting is an enduring constitution in the longest standing representative government in history.

So how does this apply to your business and operating agreement? A few lessons:

  1. Do not create a war time Operating Agreement. When starting a business you are thinking about how to obtain clients, produce a product, marketing, and may other items other than your operating agreement. The agreement should not be viewed as a 'necessary evil' highly technical legal document. It is a roadmap to problem solving. Your operating agreement is essential to the functionality of the business. It should be thorough and allow for your business to grow.

  2. Be Flexible. Your operating agreement should not be so rigid you have to pass on business opportunities. Allow for some modification within reason.

  3. This is a business. While you may be going into business with friends, it is not a 'league of friends'. You are business partners and your documents should be at arm's length. Think through what happens if someone wants out of the business? Passes away? Has creditors? Get divorced? If something happens are the other partners protected and can they run the business?

  4. Powers matter. Make sure your agreement compels members to be active (if they are to be active) and can compel increased capital. You need to be sure everyone is committed to the business and can get through tough times if they arise, or seize new opportunities.

  5. Use Experts. In the 1700's there were no experts on creating a new government. But you have the benefit of access to an attorney capable of crating an Operating Agreement that works for all parties involved.

Fun Fact: Canada had an exclusive right to join the Confederation without approval from the states.

If you need assistance with your LLC or other legal matters Senges Law Firm is prepared to help. Jason Senges is a small business lawyer in Greensboro, NC available to work through these issues and other items for your small business.

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