Is A Non-Compete Clause Necessary With An LLC?

You and several friends start a new business and decide to operate it as a limited liability company (LLC). Now that you’ve completed the first step it is now important to prepare an operating agreement. The operating agreement is a contract which governs the operations of the LLC and sets forth the arrangements made among the members, including their rights and responsibilities upon the withdrawal of a member.

A non-compete clause protects business assets like goodwill, confidential information, and trade secrets by preventing the former member from using the knowledge gained while participating as a member of the LLC to compete against the LLC.

If the operating agreement contains a non-compete provision, a former member can be precluded from engaging in a similar type of business directly or indirectly in competition with the LLC. If the operating agreement does not contain such a clause, the former member is free to compete with the LLC.

In addition, the non-compete clause may prevent the member from soliciting the LLC’s clients or customers for business. Usually, such provisions take effect after the relationship has ended, although they sometimes may preclude members from competing with the LLC during their membership in the LLC.

Is A Non-Compete Clause Required?

Members of LLCs often have intimate knowledge of the business, such as its trade secrets, confidential information, and customer lists. If members are permitted to compete with the business immediately after they withdraw, and in the same geographical location, the financial success of the original business could be jeopardized.

Although many LLCs are formed by small groups of friends or family members who get along well and trust each other in the beginning, you cannot ignore the possibility of a dispute arising in the future.

Circumstances can change, and it is important to try to prevent disagreements from undermining the success of your business. Including a non-compete clause in your operating agreement will help ensure your business is protected against a preventable harm.

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