Elements of an LLC Operating Agreement

This article addresses the basic to intermediate issues that need to be addressed in Limited Liability (LLC) operating agreements with two or more members. Basic document for an LLC is the articles of the organization that are archived to the state that charters the LLC. The majority of U.S. states do not require organizational articles to list all LLC members, and although necessary, members' identities may change over time. Thus, the most basic function of an LLC operating agreement is to identify the member (s) to third parties who trade with the LLC. Do individual members LLC have written operating agreements? Yes, precisely for the reason stated above (ie confirming for third parties the identity of the member / members). The following are what I recommend as the most important issues for an LLC operating agreement to resolve.

Identify the members
List of member ownership interests
List of members' initial capital contributions (if any)
State the method by which profits and losses are distributed among the members
State the method by which membership voting is to take place and
If the LLC has leaders (as opposed to being controlled by all members), identify the leader and indicate the issues reserved for the voice of all members, along with a mechanism for members to remove the leader.
Some of the above questions are self explanatory, but others require explanation. When non-cash assets contribute to an LLC by a member as part of initial capital contributions, the LLC's basis in the contributions contributed is the same as each contributor's basis in the assets before the contribution under the Internal Revenue Code section 723. This means that the value assigned to contributed assets in the books of the LLC (and also stated as original contributed capital in the LLC operating agreement) is the basis of that asset in the hands of the contributory member. In general, the basis is the costs paid for the asset minus any previous depreciation. Contact a tax expert for more information on the subject. Ownership interests are typically expressed in LLC operating agreements as either units (equivalent to a share in a company) or percentages of the total. If your percentage interests are assigned to members, make sure that the members' percentage of interests is 100%.

The two main types of repze llc voting are per. Capital and on the basis of ownership interests. If it is stated in an operating agreement that the voting must take place per. Capital, each member's votes must have the same weight. Membership votes based on ownership share means that each member's vote is weighted to his or her ownership share in LLC. For example, suppose XYZ, LLC has three members whose operating agreement states that they must vote on the basis of ownership interests, and the members have the following ownership interests: Member x - 15%, Member Y -% 30 and Member Z --55%. In this case, it is as if X had 15 votes, Y 30 votes and Z 55 votes out of a total of 100 votes cast. If the operating agreement of XYZ, LLC requires a simple majority to adopt any resolution that may be elected by the members, Z may then adopt any action by its 55 votes, even if both X and Y vote against the action.

The LLC Organizational Articles designate the LLC as either managed by all members or managed by a manager or managers designed by the members. To make matters more confusing, appointed leaders may even be members. Why should an LLC appoint managers? This happens most often when not all members need to be actively involved in the LLC. It may also occur where the member or members who have majority ownership in the LLC are able to extract an agreement from the minority members that the majority shall retain the management of the LLC with the exception of the minority. As the number of members grows, the practicality of having all members to manage LLC decreases. In the case of an LLC managed by managers, there are very few matters left to the members' decision. Two examples are the admission of new members and the voluntary dissolution of the LLC. However, members may write additional restrictions on the power of LLC managers in their operating agreement. Examples of such restrictions are loan transactions over a certain dollar amount, execution of any property lease, determination of salaries for employees, etc.