Last week, the Business Litigation Section of the New Hampshire Bar invited me to join their meeting at the Bar Center in order to outline for them what I believe are the major malpractice risks that New Hampshire lawyers must address in drafting operating agreements for their clients. I think there are eight principal situations in which these lawyers may face these risks.

1. These lawyers fail to make clear to the participants in the relevant LLC formation which of these participants are their clients and which are not. Their clients may include:

■Just one participant;

■Two or more participants in a joint representation (which will require a signed joint representation agreement); or

■The LLC itself as an entity in formation.

2. If these lawyers lack either LLC legal expertise or LLC tax expertise, they fail to expressly disclose these lacks to their clients.

3. These lawyers draft certificates of formation for their clients but don’t draft tailored operating agreements for them.

4. These lawyers fail to take advantage of the extraordinary flexibility of the New Hampshire LLC Act even though doing so is necessary in their clients’ best interest. For example, it is often necessary to provide in multi-member LLC operating agreements that the principal founder of the LLCs in question has no fiduciary or other duties to the other founders. Such an arrangement is clearly valid under New Hampshire LLC Act Section 107.

5. These lawyers fail to advise their clients that they (the lawyers) lack LLC tax expertise and to assist them in finding tax lawyers or accountants who possess this expertise. A lawyer’s failure to address LLC tax issues, whether directly or through associated tax professionals, can cost his or her clients tens of thousands of dollars of annual federal and New Hampshire taxes.

6. These lawyers fail to address default provisions of the New Hampshire LLC Act that are contrary to their clients’ best interest or to those of their co-members. There are roughly 120 such New Hampshire LLC Act provisions. If any of them are unfavorable to their clients, these lawyers in the relevant operating agreement should expressly override them. If they are unfavorable to their clients’ co-members, they should seek to avoid any discussion of them during the negotiation of the operating agreement.

7. These lawyers fail to define in their clients’ favor New Hampshire LLC Act terms that are inherently ambiguous as applicable to their clients. These may include even very basic New Hampshire LLC Act terms such as “member” or “manager.”

8. These lawyers fail to address and resolve in their clients’ best interest issues not addressed in the New Hampshire LLC Act. These may include, for example, dispute resolution issues and issues concerning buyouts and other consequences of member dissociations.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.

]]>