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?
• 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?”
• 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.
• 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.
• 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
• 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?
• When? How frequent? Where?
• Is action by written consent OK?
• Telephone meeting OK?
• Notices of meetings
• Minutes or records of meetings
• 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
• 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
• Issues similar to those in a corporation
• Which officers?
• How appointed?
• To whom do they report?
• 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
• 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?
• 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
• Governing Law
• Successors and Assigns