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Checklist of Provisions for an LLC Operating Agreement

Written by: David M. Adler

Article Overview: This outline presents 20 areas of LLC ownership, operation and management that should be addressed in the operating agreement.

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

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Article Tags: analogy, business activity, capital accounts, capital contributions, common shares, definitions, distributions, duration, government contract, intention, introductory clauses, lawful business, liabilities, lighting fixtures, limited liability, line of business, membership certificates, membership structure, provision, recitals



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