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 งง 6222-6232 of the Internal Revenue Code?)

20 General Provisions • Entire Agreement • Amendments • Governing Law • Notices • Successors and Assigns

Checklist of Provisions for an LLC Operating Agreement - To learn more about this author, visit David M. Adler's Website.

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