How CLF Clients Actually Use These Structures

The entity structures covered in this training are not abstractions. They correspond to specific client profiles CLF serves regularly. The following three scenarios illustrate how the doctrine maps to real CLF matters.

Scenario A: The Oklahoma Small Business Formation

Two partners — one who will run operations, one who is bringing capital — want to form a business to provide HVAC services in the Oklahoma City metro area. Neither has done this before. They're friends who trust each other and resist "overthinking" the paperwork.

Entity answer: Oklahoma LLC, manager-managed, with the operating partner as manager. Tax treatment: initially taxed as a partnership; revisit S election once the business generates meaningful income. Operating agreement: needs capital contribution schedule (one partner is contributing cash, the other is contributing tools, equipment, and sweat equity — valuation of the non-cash contribution must be determined); distribution waterfall giving the capital partner a preferred return before splitting profits; manager authority provisions; ROFR and tag-along rights; buy-sell provisions on death or disability. Non-compete: realistic scope only; Oklahoma § 219A significantly limits what is enforceable.

The challenge in this scenario: the clients resist all of this. They say "we trust each other, we don't need all of this." CLF's job is to explain, document the conversation, and get their informed decision in writing.

Scenario B: The Oil and Gas JV

An Oklahoma oil and gas operator is forming a drilling JV with two investors — one a high-net-worth individual, one a family office — to drill a series of wells in a specific field. The operator is contributing operational expertise and will manage drilling operations. The investors are contributing capital.

Entity answer: Oklahoma LLC, manager-managed, operator as manager. Tax: taxed as partnership (needed for intangible drilling cost deductions to pass through). Operating agreement: this one is complex. Capital structure with disproportionate ownership (operator gets a "promoted" interest — more economic upside than their capital contribution would normally justify, as compensation for their operational expertise and risk). Distribution waterfall with investor preferred return, then operator catch-up, then residual split reflecting the promotion. Cash call provisions — drilling cost overruns are common. Operator authority provisions allowing day-to-day drilling decisions without investor consent, but investor consent required for major decisions like abandoning a well, entering a farmout agreement, or pledging LLC assets. Information rights: investors get monthly production reports and quarterly financial statements.

The challenge in this scenario: the negotiation between the operator and investors over the carry percentage, preferred return rate, and scope of the operator's authority is the real legal work. The drafting reflects that negotiation.

Scenario C: The Family Business Restructuring

A second-generation Oklahoma family business — a construction company operating as a corporation for 30 years — wants to restructure for estate planning purposes. The founder wants to transfer interests to two adult children who both work in the business, while retaining control during her lifetime.

Entity answer: likely conversion to an LLC, or creation of a holding LLC that owns the operating corporation. This is not a simple formation matter — it involves tax planning (entity conversion, gift and estate tax implications of the transfer), governance (how to give the founder control during her lifetime while the children hold economic interests), and family dynamics (what happens when the founder is no longer able to manage the business, and how the two children resolve disputes between themselves). Involves coordination with an estate planning attorney.

The challenge in this scenario: the legal work is embedded in family relationships. Getting the governance provisions right requires understanding the family dynamics, not just the law.

The Junior Lawyer Document Review Checklist

When you are asked to review an existing operating agreement — before a transaction, as part of due diligence, or to advise a new client — use the following checklist. These are the issues that matter most and are most commonly missing or problematic.

The Ten Most Common Mistakes in LLC Formation and Drafting

These are the problems CLF sees most frequently when reviewing existing entity structures — whether in new client intake or transaction due diligence.

1. No operating agreement at all. The LLC was formed, the articles were filed, and the founders started operating — and the operating agreement was never drafted or executed. Everything defaults to the Oklahoma LLC Act. Usually discovered when something goes wrong.
2. Operating agreement executed but never signed by all members. One member signed; the other never got around to it. Courts may enforce the OA against the signing member but not the non-signing one. Always verify all signature pages.
3. Membership interest schedule not updated. The original OA reflects a 50/50 split, but over the years one member transferred 10% to a child, another 5% was issued to a key employee, and no one updated the schedule or filed amended articles. The current ownership structure is unknowable from the documents alone.
4. No tax distribution provision. The LLC generates significant income, reinvests it all, and the members discover in April that they owe tens of thousands in taxes on money they never received.
5. Annual certificate lapsed. The LLC has been administratively dissolved by the Oklahoma Secretary of State because annual certificates were not filed. The LLC technically cannot enforce contracts or file suit. Curable, but requires reinstatement filings and explanations to counterparties.
6. Bank accounts still in the founder's personal name. All of the LLC's revenue flows through a personal account. Classic veil-piercing evidence — a creditor's dream.
7. Unrealistic non-compete provisions. The operating agreement has a broad, multi-year non-compete drafted as if Oklahoma were Texas. It may be entirely unenforceable under § 219A. The client has false confidence in a covenant that a court will likely void.
8. No buy-sell mechanism on death. A member dies; their interest passes to a spouse or child who has no expertise in or interest in the business, and the OA provides no mechanism for the remaining members to buy that interest. The surviving business owners are now partners with a grieving family member who needs the money but can't be forced to sell at a reasonable price.
9. Blank valuation provisions. The OA says interests will be bought out at "fair market value" — and nothing else. No mechanism, no appraiser process, no agreed-value update obligation. Guarantees litigation.
10. S corp eligibility violation, undiscovered. The LLC made an S election years ago. Since then, a member transferred 1% of their interest to their LLC (an ineligible holder), terminating S status without anyone realizing it. The entity has been filing as an S corp but is actually a C corp. When this surfaces — often in a transaction — the tax consequences can be severe.

Adjacent Areas You'll Encounter This Summer

Corporate and entity law does not exist in isolation. CLF's clients regularly present issues that touch adjacent areas of law. You don't need to be an expert in these — but you need to know enough to spot the issue, flag it for the supervising attorney, and not miss it entirely.

Securities Law — Private Placements

When an LLC (or corporation) raises capital from investors — even just two or three of them — it is almost certainly making a "sale of securities" under federal and state securities law. The Securities Act of 1933 requires registration of securities offerings unless an exemption applies.

The most common exemption for CLF clients is Rule 506(b) under Regulation D — a private placement to up to 35 non-accredited investors (with disclosure requirements) and an unlimited number of accredited investors, with no general solicitation. If the offering meets Rule 506(b)'s conditions, it is exempt from federal registration. A Form D must be filed with the SEC within 15 days of the first sale.

Oklahoma also has state-level securities registration requirements (the "Blue Sky" laws). Oklahoma has its own Uniform Securities Act, Okla. Stat. tit. 71, which requires registration of securities offerings or an applicable exemption.

When to flag: any time a client mentions taking on investors, selling interests to more than one or two people, or raising capital from people who are not the founders. Securities compliance is not optional and the consequences of non-compliance (rescission rights, civil liability, criminal exposure) are severe.

Employment and Contractor Classification

Many CLF business clients use independent contractors to reduce payroll costs and administrative burden. Worker misclassification — treating someone as an independent contractor who is actually an employee under IRS or Department of Labor standards — is one of the most common and expensive mistakes small businesses make.

The IRS uses a multi-factor test focused on behavioral control, financial control, and the type of relationship to determine classification. The Department of Labor uses an "economic reality" test. Oklahoma also has its own rules for state tax and workers' compensation purposes.

When to flag: any time a client has workers performing regular, ongoing services who are being paid as 1099 contractors rather than W-2 employees. This is especially common in construction, HVAC, landscaping, and professional services businesses.

Intellectual Property — Ownership in the LLC Context

When a member contributes intellectual property — software, trade secrets, a patent, a brand — to an LLC, the operating agreement and any accompanying IP assignment agreement must clearly document that the IP is now owned by the LLC, not the member personally. Without a written IP assignment, ownership remains with the individual member, which creates enormous problems if the member later leaves or disputes arise.

Similarly, when employees or contractors create IP while working for the LLC, the LLC needs written work-for-hire agreements or assignment agreements to ensure it owns what its people create. Absent these, the creator (employee or contractor) may retain IP ownership under copyright law.

When to flag: any time a new LLC has a technology component, a brand, or trade secrets that a founder contributed. Ask: is there a written IP assignment? If not, the LLC may not own its most valuable asset.

Real Property Issues in LLC Transactions

CLF's oil and gas and real estate clients regularly involve real property — mineral interests, surface rights, commercial property, and development land. A few issues to be aware of:

• Title to real property must be held in the LLC's name. If a member contributes real property to the LLC, an actual deed must be executed and recorded transferring title to the LLC. A provision in the operating agreement alone does not transfer real property title.
• Mineral interests require separate transfer documentation. In Oklahoma, mineral interests are severable from surface rights and must be separately conveyed. An oil and gas LLC holding mineral interests must have properly executed and recorded assignments.
• Existing liens and mortgages. When property is contributed to an LLC subject to a mortgage, the lender's consent may be required. "Due on sale" clauses in mortgage documents can be triggered by a transfer to an LLC even if the same person controls both.

Probate and Estate Planning Intersection

CLF's estate planning practice intersects constantly with entity work. LLC interests are estate assets — they must be accounted for in estate planning and administered through probate (or trust administration) on death. Issues include:

• Does the deceased member's interest pass automatically to a surviving spouse under a beneficiary designation or joint tenancy? (Probably not — LLC interests don't work that way without specific OA provisions or a POD designation.)
• Is the LLC interest part of the probate estate, or does it pass through a trust?
• How is the interest valued for estate tax purposes? (Minority discounts and lack-of-marketability discounts can significantly reduce the taxable value of an LLC interest.)

Working With Supervising Attorneys: Practical Expectations

A few direct observations about what makes an intern effective in a transactional practice:

Ask Before Assuming

If you are asked to review an operating agreement and flag issues, ask the supervising attorney what specific issues they are concerned about before you start. A due diligence review for a transaction has different focus areas than a review for a new client intake. Do not spend three hours on the wrong thing.

Deliver Clean Work Product

Memos, redlines, and drafts should be formatted professionally, cite to specific provisions and statutes, and have a clear conclusion or recommendation where one is possible. A memo that says "there might be an issue with the transfer restrictions" is not useful. "The transfer restriction provision in Section 7.2 does not include a ROFR waiver period — if a member receives a third-party offer and the LLC fails to respond within the notice period, it is unclear whether the ROFR lapses automatically. This should be addressed in the next OA amendment" is useful.

Track Your Own Deadlines

No one will track your deadlines for you. If you are assigned a task with a due date, calendar it, meet it, and communicate proactively if something comes up that will prevent you from meeting it. The worst thing you can do is let a deadline pass silently.

Manage Expectations on Research Scope

If you are asked a research question and the honest answer is "this is complicated and I am not sure," say so — with your best assessment and the sources you've found. Do not deliver a confident-sounding wrong answer. Do not deliver an answer that papers over genuine uncertainty. Supervising attorneys rely on intern research; a missed issue that gets delivered as "no issue" can cause real problems.

Key Terms — Session 11