Small LLCs, large LLCs and malpractice

John Cunningham

As any LLC lawyer can tell you, there is not just one kind of New Hampshire multi-member LLC; there are two — namely, small LLCs and large ones – and there are very few in between. And LLC lawyers will tell you that these two kinds of LLCs differ dramatically, not only in their size but also, and even more so, in the operating agreements that govern them.

Most of the LLCs owned by readers of this journal are small LLCs, but a few are large. A few of the small ones will become large, and a few that remain small will find themselves doing deals with large ones, including joint venture deals.

So the members of small LLCs and their lawyers need to understand large LLCs. The chief characteristics of both kinds are numerous — at least 15 for each by my count. But the most important characteristics are these:

• The members of small LLCs are individuals, and they have known one another for years before they formed their LLCs together. So they trust each other.
• Few, if any, small LLC members are wealthy.
• Each of them has contributed only a few thousand dollars to their LLCs to get them started, and sometimes only a few hundred dollars. They have made no post-formation contributions to their LLCs.
• Small LLCs make only modest annual net incomes — perhaps in the tens or hundreds of thousand dollars, but never in the millions.
• Because of the mutual trust among their members, the same lawyers have represented all of the members simultaneously in forming their LLCs, and they have charged the members only modest fees for their work—perhaps, on average, $2,300.

By contrast:

• The members of LLCs that, even when first formed, have been large LLCs are mainly entities, not individuals.
• These members did not know each other before coming together to form their LLCs, and while they do not deeply distrust one another, neither do they deeply trust them.
• Each of the members has substantial financial resources.
• The members have made substantial initial cash contributions to their LLCs and have often made substantial post-formation contributions.
• Each of the members of large LLCs can afford their own lawyers in forming their LLCs, and each is represented by their own lawyer.
• Because each member has its own lawyer, the operating agreements of large LLCs are heavily negotiated for heavy legal fees. Nice for lawyers, but if the lawyers make mistakes, their clients can afford to sue them for malpractice, and they will.

I represent both small and large LLCs, and I’ve drafted and reviewed operating agreements for both kinds. I’ve always hated to review on my clients’ behalf the large LLC operating agreements drafted by other lawyers. This is because, in my experience, most of these agreements are written in horrific legalese.

It’s a large-form lawyer tradition. If you own a small New Hampshire LLC and you do a contract deal with a large one, brace yourself for legalese.

I think LLC lawyers owe it to their clients to write operating agreements their clients can actually understand. Plain English is my religion. Down with legalese!

John Cunningham is an attorney of counsel to the law firm of McLane Middleton whose practice is focused on LLC law and tax. He can be contacted at lawjmc@comcast.net, 603-856-7172 or llc199A.com.