- February 21, 2024
- All About LLCs
An LLC takes on a life of its own, separate from any human being. The heartbeat that gives the LLC its life is the purpose clause. Most Operating Agreement templates will draft this purpose clause in the broadest way possible with language that says,
“The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state”
Should you draft this very broadly using the catch all sentence, or should you write a specific purpose, like owning and operating a specific property? While drafting a catch all clause, would give the LLC the ability to diversify into any business it wants. While it sounds logical to avoid restrictions there are some factors you should consider.
Financing
If you have a business that needs funding, the lender would want to safeguard that you will operate according to the plan. A catchall purpose clause would not satisfy that.
Dissolution
Members may have disagreements over the direction of the LLC, which veered from the original plan. A catchall purpose clause would not allow a member to sue for dissolution on the grounds that the LLC cannot fulfill its stated purpose. A narrow purpose will safeguard all the members.
Non Compete
If you have a non-compete clause for all the members, a catch-all clause will make that worthless, because there is no stated purpose.
Liability Protection
If you use a catch all purpose, the ambiguity could create opportunities for creditors or legal challengers to argue that certain actions weren’t authorized, potentially piercing the LLC’s veil of limited liability.
Whether you use a catchall or narrow purpose clause, consider including a provision allowing for future amendments to the purpose clause to adapt to evolving business needs.
Note:
Information provided here is for general knowledge only, consult a lawyer or CPA in your state for specific legal advice.
Tzvi Weiser is an LLC specialist with a rich business background, serving in executive positions in real estate, hi-tech and international marketing. He was a New York lawyer and has an MBA and accounting degree.
