A limited liability company (LLC) operating agreement is a critical document that governs the internal operations of an LLC and establishes the rights and obligations of its member(s). Below is a non-exhaustive list of key considerations and provisions that should be addressed and included in a well-drafted operating agreement.
Management Structure: The agreement should specify whether the LLC’s management structure is member-managed or manager-managed. In member-managed LLCs, the management and conduct of the company are vested in the members, with equal rights in decision-making unless otherwise specified within the agreement. In manager-managed LLCs, the managers have the authority to handle the day-to-day decisions for the LLC without first receiving approval from the members, subject to any limitations in the agreement.
Voting Rights and Decision-Making: The agreement should address the voting rights of the members, including whether voting is based on percentage of ownership, financial interest, or another basis. The agreement should also specify the voting thresholds required for various actions, such as amendments to the operating agreement, taking on loans, admitting new members, and selling the company. If the LLC is taxed as a partnership, the agreement could also define different classes of membership units with different voting rights.
Officers and Their Appointment: If the LLC has officers, the agreement should specify their titles, powers, duties, and the process for their appointment and removal. Officers serve at the pleasure of the managers or members unless otherwise provided within the agreement.
Contributions, Capital Structure, and Distributions: The agreement should address initial and additional capital contributions, the maintenance of capital accounts, and the allocation of profits and losses among members. In addition, the agreement should specify how and when distributions will be made to members, if the company will commit to distributing at least enough cash for each member to pay its estimated annual taxes, and how assets will be distributed upon dissolution.
Transfers of Membership Interests and Events that Trigger a Buyout: The agreement should include provisions that govern transferring membership interests to third parties, the admission of new members, the withdrawal or termination of existing members, and events that trigger a buyout of a member. The agreement should specify how a member’s interest will be valued at the time of a buyout, and the procedures for making the buyout payment.
Fiduciary Duties and Limitations: The agreement may include provisions that alter or limit fiduciary duties, such as the duty of loyalty or care, but cannot eliminate them entirely except under specific circumstances. The language altering the fiduciary duties of the members or managers must be clear and unambiguous. For example, fiduciary duties may be limited if the agreement expressly reallocates responsibilities among members.
Indemnification and Liability: The agreement may include provisions for indemnifying members or managers and limiting their liability for money damages, except in cases of breach of the duty of loyalty, intentional harm, or criminal violations.
Record Keeping and Reporting: The agreement may include provisions that address the maintenance of accounting records, financial statements, and reports, as well as the rights of members to access these records.
Confidentiality and Intellectual Property Assignment: The agreement should include the assignment of intellectual property created by a member in their role as a member, manager, or officer, as well as a requirement to maintain confidentiality of the LLC’s proprietary information and other confidential information. If members have intellectual property that they created before their admission to the LLC or will continue to work on while a member of the LLC, this IP should be expressly excluded from the assignment provisions of the LLC, especially if the IP is in any way related to the business activities of the LLC.
Dispute Resolution: The agreement should include provisions for resolving disputes among the members, such as mediation or arbitration clauses. Also, if the members or managers could become deadlocked in a vote (meaning the vote is split at 50/50), there should be a mechanism in the agreement to resolve the deadlock.
By addressing these considerations, and any additional considerations and provisions relevant to the specific needs of the LLC, the operating agreement can ensure clarity on these important topics, reduce the potential for disputes, and provide a framework for the efficient operation of the LLC. Given its role as the key governing document of the LLC, it is advisable to draft the agreement with the assistance of an experienced attorney.
Disclaimer:This post discusses a general legal topic, is intended to serve as informational only, and may not reflect the most current legal parameters in your jurisdiction. This informational post is not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Archetype Legal PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post.
