Following are some of the more important issues an LLC operating agreement should address.
Contributions of cash, property, and/or services are made by LLC members to initiate the business. Although, as with other business entities, members would normally own a percentage of the LLC based on the percentage of their contributions, such is not necessarily the case in an LLC. LLC members can determine the percentage of ownership in any way they choose.
While an LLC is generally managed by its members, they can be “manager managed” by one or more managers who may or may not be members. The specifics surrounding manager management should be set forth in the LLC’s operating agreement.
Although many decisions in an LLC can be made informally, the operating agreement should indicate under what circumstances voting is required, the number of votes needed for a decision, and whether each member is to have one vote or voting power is to be determined based upon percentage of ownership.
Allocation of Profits & Losses
As in the case of most other business entities, one would expect profits, losses, and any other tax consequences to be allocated based on the members’ percentage of ownership. But in an LLC, these allocations can be as set forth in the operating agreement and they can be disproportionate to the members’ ownership.
The amount and timing of distributions to members should be included in an LLC operating agreement. This deserves particular attention since the members’ financial situations may differ, and with “pass-through” tax treatment, “Phantom Income” often comes as a rude shock.
Members’ Rights & Responsibilities
The rights as well as the duties of LLC members should be outlined in the operating agreement.
It is important that LLC operating agreements include what will happen when a new member is added as well as when a member dies, becomes disabled, retires, or simply wants to sell their ownership. Any rights and/or obligations to purchase a member’s ownership under certain circumstances should also be covered.
Amendments & Dissolution
An LLC operating agreement should also address if/when/how the operating agreement itself can be amended as well as if/when/how the LLC is to be dissolved.
We have addressed, in a very general way, only some of the more important things an LLC operating agreement should include. Your attorney and accountant should be able to help you create one that covers all of the bases and assures the best possible results for you and any other owners. Investing the time and resources required to create an LLC operating agreement designed to meet your specific needs will pay big dividends for years to come.