Checklist of Provisions for an LLC Operating Agreement
Checklist of Provisions for an LLC Operating Agreement
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 members 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 companys 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.
Like this article? Share it with your friends
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 members 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 companys 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.
Like this article? Share it with your friends
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