Key Provisions of an LLC Operating Agreement

An Operating Agreement is a crucial document for Limited Liability Companies (LLCs). It outlines the governance and operational details of the LLC.

Here are key provisions owners should consider:

Ownership Interests:

· Capital Contributions: Details regarding initial contributions by each member, including cash, property, or services.

· Ownership Percentage: Specifies the percentage ownership of each member.

Management and Decision Making:

· Management Structure: Determine whether the LLC will be managed by its members (member-managed) or by designated managers (manager-managed).

· Voting Rights: Defines how voting will take place, e.g., per capita or based on ownership interest.

· Major Decisions: Specify any decisions that require unanimous consent or a particular voting threshold.

Distributions: Details about how profits and losses will be distributed amongst the members. This could be based on ownership percentages or another agreed-upon method.

Member Withdrawal or Addition: Processes and terms under which:

· A member can leave or be added.

· How the member’s share will be evaluated and bought out.

Transfer of Interests: Defines the restrictions and permissions related to selling or transferring an LLC interest to third parties. Transfer restrictions often include rights of first refusal or specific approval processes.

Fiduciary Duties: Details the responsibilities and obligations that members and managers owe to the LLC and to each other, including the duty of loyalty and the duty of care. Potential for waiver if desired.

Indemnification: Specifies circumstances under which the LLC will indemnify and hold harmless members or managers from liabilities arising out of their roles.

Amendment Process: Specifies the process by which the Operating Agreement can be amended, including voting requirements.

Dispute Resolution: Methods for handling disputes, which may include forms of negotiation, mediation, arbitration, or litigation.

Non-Compete and Confidentiality: May stipulate that members cannot engage in competing businesses and must maintain the confidentiality of LLC operations and information.

Admission of New Members: Provides a procedure for admitting new members, including capital contributions, ownership percentage, and any requisite approvals.

Takeaway:

While the above is a concise list of typical provisions, each LLC’s Operating Agreement should be tailored to its unique circumstances. It is recommended you work closely with a knowledgeable attorney when drafting or revising such an agreement.

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