LLC Operating Agreements: Key Provisions

Whether starting a new business or operating a long-standing company, one of a LLC’s most important steps will be to formulate a meaningful and complete operating agreement. An Operating Agreement will determine various components of the company’s operation and define and detail the relationship among the members of the company. The following represent several key considerations and provisions in an LLC’s Operating Agreement:

1. Membership Interests. In order to clarify ownership matters, an LLC Operating Agreement should specify the percentage ownership interest of each member of the company, together with the amount of their initial capital contribution. Furthermore, the agreement should contain specific rights and restrictions with respect to the redemption of members’ interest by the company, the admission of new members to the LLC and the voluntary withdrawal of members from the company. Many of these matters can are critical to the company’s long-term growth and are best negotiated and determined from the outset.

2. Restrictions of Transferability of Membership Interests. A well-drafted Operating Agreement will place some clear restrictions on the transfer of members’ ownership interests. Similarly, certain types of transfers may be specifically permitted without requiring any type of member vote or approval (transfers among existing members, transfers to the company, transfer’s to a member’s trust, etc.) Transfer restrictions or absolute prohibitions often include restrictions on transfers to outside parties without majority approval and prohibitions on transfers to creditors. Furthermore, certain provisions can be included to protect the company in the event of a member’s bankruptcy, divorce or death.

3. Manager-Managed vs. Member-Managed. In conjunction with the LLC’s Articles of Organization the Operating Agreement, should indicate who is authorized to make the day-to-day decisions of the company. Typically, this would be either a designated “Manager” or one or more of the members of the LLC, called a “Managing Member.” Additionally, the duties and obligations of the manager or managing member(s) should be clearly described in the Operating Agreement, including such matters as their potential liability, the company’s indemnification of such member/manager and whether they are compensated for their work.

4. Additional Capital Contributions. As mentioned above, the Operating Agreement should delineate the specific capital contribution of each of the members. Additionally, an operating agreement should clarify if and when additional contributions will be required and whether majority or unanimous consent will necessary to require such additional capital contributions.

5. Membership Voting. An Operating Agreement should clearly define how membership votes are calculated, who has voting rights and what sort of approval (majority, super-majority, unanimous) is required for certain decision or actions of the company.

LLC Ownership: Avoiding Personal Liability

In order for shareholders or members of a corporation or LLC to enjoy protection from personal liability for the company’s debts, obligations and other legal liabilities, the following principles must be followed:

Adequate Capitalization and Funding of the Company: A company must be adequately funded, with amounts sufficient to operate the company and pay its regular bills. Adequate insurance coverage may also be considered.

Adequate Corporate Formalities: A company must hold regular meetings, keep accurate company records and have functioning officers/directors if such are appointed.

Treatment of Company as Separate Business Entity: Business owners cannot merely use the company as a “façade” for personal dealings. Co-mingling of business and personals funds is prohibited and the owner cannot treat the assets as his/her personal property. Relationships with related companies must also be handled in an “arm’s length” fashion.

No Improper Purpose or Reckless Disregard for Rights of Others: A business entity cannot be abused to infringe the rights of others and maintain limited liability protection.