Checklist of Provisions for an LLC Operating Agreement

1 Introductory Clauses and Definitions (Both are optional but common) • Recitals as to the “persons” forming the LLC • Recitals as to the objectives of the LLC • Recitals as to the possibility of or intention to admit additional members • Appropriate recitals if the LLC replaces a previous agreement between the parties 2 Basic Membership Structure • Analogy to corporation • All common shares or division between common and preferred? • Different classes of preferred? • Do all members have the same rights, or should there be different classes for voting, distributions, or both? 3 Purposes • Any lawful business activity or limit the purpose to something more specific? • Specific line of business (e.g., manufacture lighting fixtures) • Specific contract (e.g., perform the obligations under a certain government contract) • State that the purpose of the LLC is for a certain business, but then add another provision allowing “any lawful business?” 4 Duration • Continue until dissolved? • Some fixed term? • Automatic renewals after that? 5 Membership Certificates • Not necessary - can provide that a notice will be provided to any member specifying his or her interest on request • Can develop one and put it as an exhibit • May want some details such as who can sign certificates, etc. • Procedures for replacing lost certificates? 6 Seal — If Desired 7 Statement of Limited Liability 8 Capital Contributions • Often listed in an exhibit • Should the agreement provide for the amendment of that exhibit from time to time? • If no additional capital contributions are allowed, the agreement might so provide. • If additional capital contributions are called for, the procedures for making them should be spelled out. • The liabilities and responsibilities of the parties in the event a member does not make a required capital contribution when one is called for should be spelled out in detail, including procedures to be followed. 9 Capital Accounts • Agreements generally provide that no interest shall be paid on any capital account and that no member is entitled to the return of his or her capital account. • Required by tax law and also as a practical matter so that members know the value of their interests from time to time. • Tax law contains some complex but mandatory rules, agreement should incorporate those by reference and provide that capital accounts should be maintained in accordance with those rules. • Same for allocations of income, gain, loss, deductions, and credits. • Provide that, if LLC provisions are inconsistent with tax law, the tax law governs. • Consider review by a tax expert. 10 Distributions • Procedures for calling for and making distributions (can be open-ended - i.e., distributions made when members agree). • Made in proportion to their membership interests? • Is it appropriate to have mandatory quarterly distributions in the amount of each member’s expected tax liability so that such liability could be paid with the quarterly estimates? • Prohibition of any distribution which would violate relevant laws. 11 Dissolution • When specified in the relevant documents • When the members (or managers) decide • Appointment of a “liquidator” • Final accounting procedures • Assets sold, distributed to members, or a combination? • Priorities for distribution • creditors (include members who are also creditors?) • members, in accordance with the law or relevant documents • Requirement that certificate of formation be canceled upon dissolution 12 Management • By members or some other way • Members elect managers, who then appoint officers • One of the members manages the LLC • LLC contracts with a manager • Management by members • Who is a member? • Member of record as of a certain date? • Need to prepare a list of members entitled to vote? • Can an interested member participate fully, or only for those transactions in which the member is not interested? • Meetings • When? How frequent? Where? • Is action by written consent OK? • Telephone meeting OK? • Notices of meetings • Quorum • Adjournments • Minutes or records of meetings • Committees • How appointed? • Whom do they represent? • How can they be removed? • What powers do they have? • Any additional compensation for members serving on a committee and attending committee meetings? • Majority rule for all things, or supermajority for some? • Appointment or removal of certain officers or individuals • Material change in the nature of the business • Transactions over a certain dollar amount • Borrowings, pledges or leases over a certain amount • Any merger or acquisition or any sale of a portion of the business • Any change in the governing documents • Admission of new members or removal of existing members • Transactions between the LLC and any of the members • Liquidation • Management by Managers • Issues similar to those in the by-laws of regular corporations • How many managers? • How elected? How removed? • Term of office • How are vacancies to be filled? • Meetings - regular / special • Other issues similar to those above • Officers • Issues similar to those in a corporation • Which officers? • How appointed? • To whom do they report? • Removal • Resignation • Compensation 13 Indemnification • Decision as to whether to take maximum advantage of all flexibility allowed by state law • Generally this is done - sometimes even including any flexibility authorized by new laws. • Procedures for indemnification • Who authorizes? • Include advancing defense costs • Indemnification even after termination of relationship of indemnified party with the company? • Exclusion for claims brought by the person seeking indemnification 14 Insurance • Include authorization to purchase Director and Officer insurance. 15 Transfers of Membership Interest • Allowed but only with the consent of the board or other members and only if the transferee executes the same documents executed by the other members? • Exceptions for such things as transfer to related parties or affiliates? • Rights of the transferee until the transferee is admitted as a substitute member? • Generally, transferee has no right to vote or participate in the management of the business. • Should there by a right of first refusal on the part of the LLC, or the other members of the LLC, if a member wants to transfer its interest to an unrelated party? 16 Withdrawal • Can be governed by the agreement. • May not be able to prevent withdrawal, but agreement could make such withdrawal a breach and establish certain rights and remedies. • No member can withdraw or be repaid its capital contribution. • No withdrawing member can receive any of its capital contribution unless all debts of the LLC have been paid or provided for. • Exception for any restrictions on withdrawal upon consent of all the other members? 17 Books and Records • Complete and accurate books and records to be maintained and kept at (designated place). • Often the company’s principal place of business • Must maintain a complete and accurate list of all members and their membership interests. • Provision allowing any records to be kept electronically. 18 Fiscal Year • Important to establish - often the calendar year. 19 Tax Classification • Generally a partnership and members should agree not to do anything inconsistent with that. • Should designate a “tax matters partner” and should establish the duty of the tax matters partner to file returns, consult and notify members as appropriate, etc. • For what things might the tax partner be required to obtain permission from the other members? (Perhaps anything contemplated by §§ 6222-6232 of the Internal Revenue Code?) 20 General Provisions • Entire Agreement • Amendments • Governing Law • Notices • Successors and Assigns


David is an attorney, entrepreneur and recognized speaker on intellectual property, media & entertainment, and technology law with a practice focused on counseling businesses across the interrelated areas of Intellectual Property, Media & Entertainment, Information Technology and Business Law. He provides legal counsel on trademark and copyright clearance, registration and enforcement, digital & new media licensing, production, finance, regulations, litigation and corporate-com...

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