Follow Up To LLC Part 1: Getting that other LLC Member

Last week one of the readers left me a comment asking me whether or not he could use his spouse as the minority partner.  Here was my comment:

Generally the best way to avoid losing charging order protection is to get another member.  Because you do not want to lose control, it is best that you give that member a very small portion of the LLC.   I will write a post on this later, but most states give the LLC members a great deal of flexibility.  The California LLC Act allows members to break free from the California LLC Act’s standards by writing into an operating agreement the way the members want the LLC to operate.  This means you can make the call.  You get to write this operating agreement in a way that benefits you as the primary member.   If the other member has 5% or less, and decisions are made by a 65% member or manager vote, (corporate super majority) then you really can run the LLC on your own terms. You need to make sure you address two things however.  

1. Either you need to also write into the operating agreement that the members holding 65% or more do not need to notify the other members to make these decisions, or you need to always call some sort of phone or other meeting when you are making decisions that would generally require a meeting of the members or managers.  It is always good to show that you are following what is in the operating agreement.
2. Second, if you have another member, the money has to be split their way also.  Make sure you assess the tax consequences and necessity of giving that member his portion of distributions if you distribute money out.

A spouse is not a good option for a junior member. The point is to distribute the injury of having an unwanted member in a bankruptcy suit. You and your wife are considered one.