Operating Agreement Must-Haves
Clients often ask me about setting up a ‘simple’ multi-member LLC. Some multi-member LLCs may function just fine with simple operating agreements, but the typical multi-member Operating Agreement is complex. State laws do not dictate very much about how LLCs operate, so the members of an LLC need to make their own operating rules in an agreement. Failing to address details like transfers of interest, disbursements, and voting can cause really big problems later on.
As I often explain to my clients, an Operating Agreement is like an appliance user manual. You hope you never have to read it, but if something goes wrong, it had better explain what you’re supposed to do! So here is a high-level list of some of terms that you need to discuss and agree upon before you’re ready for your Operating Agreement:
· Who are the parties?
· LLC’s name?
· Registered agent for service of process within the state of organization?
· Principal place of business?
· How can the LLC admit new members?
· Is the LLC manager-managed (usually the right choice) and if so, what powers does the manager have? Who is the manager and how is he/she elected and replaced?
· Do the members have voting rights? If so, what matters can they vote on (usually matters of a certain level of significance)? What vote is required to approve a matter (majority, supermajority, unanimous)? Are there some actions that require a higher-level vote than others?
· Is there one class of interest or multiple classes with different rights?
· How does the LLC manage additional capital contributions? Does the contributor’s ownership increase or is it treated as a loan? Can the company require members to contribute additional capital in a ‘capital call’?
· Will the LLC hold periodic meetings? How will members receive notice of meetings? Is it okay to take actions by written consent in lieu of a meeting? Can a member act by proxy?
· How will the LLC run its day-to-day operations? Who has authority to sign for the LLC? It’s typically too much to require every member to sign every check or be present to open a bank account, so what level of control are the members comfortable with?
· Can a member voluntarily disassociate from the LLC?
· Must the LLC purchase a disassociated member’s interest? If so, how will the parties determine a purchase price?
· What happens if a member passes away or becomes disabled?
These are only a handful of the issues that arise when you’re forming an LLC. It may seem like a lot, but these terms are essential to consider and set out in the Operating Agreement before you begin. Getting comfortable discussing hard issues and putting your plans in writing can be a wonderful first step for business partners to take and can help you build a strong team mentality from day one.