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Why LLCs Need a Strong Operating Agreement From Day One

Starting a new venture, especially one built on your great invention or idea, is exciting! You’ve filed your Articles of Organization with the State, and your Limited Liability Company (LLC) is officially born. It’s tempting to jump straight into selling your “widget” and chasing those initial sales.

But here’s a crucial lesson many successful (and struggling) founders learn the hard way: Skipping the Operating Agreement is like building a skyscraper without blueprints. As a small intellectual property firm, we see how often this oversight leads to painful, expensive conflicts later.

Even the simplest “garage-type” startup can quickly explode into a multi-million-dollar international company. When that happens, relying on faulty human memory and vague understandings is a recipe for disaster among the founders. A well-drafted Operating Agreement is the essential legal document that guides your LLC, protects your IP, and makes the road to achieving your business goals much smoother.

Your Operating Agreement: The Blueprint for Success

Think of the Operating Agreement as the constitution for your company and the safeguard for your most valuable assets—your Intellectual Property (IP). It doesn’t just address who owns what; it lays out the rules for everything from daily operations to major life-cycle events.

Key IP and Equity Issues to Define

For an LLC founded on an invention or creative IP, your Operating Agreement must clearly define:

• Declaration of Ownership Interests: This is critical. It must explicitly state each member’s exact percentage ownership in the LLC’s Intellectual Properties (patents, trademarks, copyrights, trade secrets, etc.), not just the company itself.
• Equity Unit Types and Contributions: How are ownership units issued? The agreement should clarify the type of equity a member receives for different contributions, such as capital, licensed/leased IP, or sweat equity.
• Vesting: Define the vesting schedule for members’ rights and privileges to ensure founders are incentivized to stay with the company as it grows.

Navigate Management and Growth

As your company transitions from a startup to a mature business, the Operating Agreement provides the framework for efficient operation:

• Day-to-Day Management: Will the LLC be managed by the members or by a hired non-member manager? Crucially, what are the restraints on management’s authority?
• Meetings and Decisions: Clear rules on annual and special meetings, including quorums, majority, and supermajority voting requirements, prevent stalemates when big decisions are needed.
• Membership Qualifications: Set clear criteria for new members or investors, including limits on the maximum number of shareholders, which can be vital for compliance with federal securities law.

Strong Operating Agreements Plan for the Unexpected

Successful companies experience business cycles, and sometimes, members leave or need to be replaced. You need a plan for those “up-and-down” moments:

• Withdrawal: Set the requirements for a withdrawing member or the estate of a deceased member. This prevents the chaotic valuation and transfer of ownership upon a departure.
• Forced Withdrawal: Outline the specific conditions under which a member can be forced to withdraw from the LLC (e.g., breach of fiduciary duty, criminal conviction, etc.).
• Exit Strategies (Milestones): Establish clear milestones for selling the LLC (asset purchase, equity sale, merger) or ceasing operations (bankruptcy). This ensures all owners are aligned on the criteria for a significant life-cycle event before a high-pressure offer is on the table.

A strong Operating Agreement, crafted with the future success and complexity of your Intellectual Properties in mind, is an investment that pays dividends by preventing disputes, clarifying ownership, and allowing you to focus on sales and profitability.

Ready to protect your IP and ensure a smooth operational path for your LLC?

Ask Us Anything…About Intellectual Property!

If you or your business are in the greater Cincinnati, Indianapolis, Lexington, or Louisville standard metropolitan statistical areas and have a topic or question you would like Business Patent Law, PLLC to address in the blog, please send us an email.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.  If you need assistance, please contact Business Patent Law, PLLC.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Term Extension for Medical Patents

The maximum term extension for Medical Patents (and the invention claimed in a Medical Patent that was the subject of regulatory review) is five years from the original expiration date.

The regulatory body for this type of exemption is generally the Food and Drug Administration.

However, not all Medical Patents receive the benefit of the maximum term extension.

What Type of Medical Patents Receive Maximum Term Extensions?

35 U.S.C. §156, in part, reads:

(g) For purposes of this section, the term “regulatory review period” has the following meanings:

(1) (A) In the case of a product which is a new drug, antibiotic drug, or human biological product, the term means the period described in subparagraph (B) to which the limitation described in paragraph (6) applies.

(B) The regulatory review period for a new drug, antibiotic drug, or human biological product is the sum of …

(i) the period beginning on the date an exemption under subsection (i) of section 505 or subsection (d) of section 507 2 became effective for the approved product and ending on the date an application was initially submitted for such drug product under section 351, 505, or 507,2 and

(ii) the period beginning on the date the application was initially submitted for the approved product under section 351, subsection (b) of section 505, or section 507 2 and ending on the date such application was approved under such section.

(3)  (A) In the case of a product which is a medical device, the term means the period described in subparagraph (B) to which the limitation described in paragraph (6) applies.

(B) The regulatory review period for a medical device is the sum of—

(i) the period beginning on the date a clinical investigation on humans involving the device was begun and ending on the date an application was initially submitted with respect to the device under section 515, and

(ii) the period beginning on the date an application was initially submitted with respect to the device under section 515 and ending on the date such application was approved under such Act or the period beginning on the date a notice of completion of product development protocol was initially submitted under section 515(f)(5) and ending on the date the protocol was declared completed under section 515(f)(6).

(6) A period determined under any of the preceding paragraphs is subject to the following limitations:

(A) If the patent involved was issued after the date of the enactment of this section, the period of extension determined on the basis of the regulatory review period determined under any such paragraph may not exceed five years.

Conclusion

New drugs, antibiotic drugs or human biological products and Class III medical devices subject to FDA approval can be granted a five-year term extension from the original expiration date of the Patent.

Medical devices approved under the 510K process are not eligible for any term extension of the Patent.

Ask Us Anything…about Intellectual Property!

If you or your business are in the greater Cincinnati, Indianapolis, Lexington, or Louisville standard metropolitan statistical areas and have a topic or question you would like Business Patent Law, PLLC to address in the blog, please send us an email.

Business Patent Law, PLLC provides intellectual property and business counsel for businesses and companies.  If you need assistance, please contact Business Patent Law, PLLC.

If you would like to stay up-to-date with news that impacts your business and intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.