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Written by : Benjamin Pesantes |
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an LLC operating agreement is a legally binding business document that entails the ownership of its members how the company is managed and the structure of the LLC or limited liability company it can provide details such as one meetings are held naming a registered agent selecting managers and adding and dropping members an LLC offers flexibility and combine the liability protection of a corporation with the tax treatment of a partnership you can file a simple certificate with the relevant state of formation an LLC will be governed by the state LLC laws what is the purpose of an LLC operating agreement it has many roles it defines the company's management structure it describes how the company's profits and assets are allocated and distributed it defines and sets out the agreements between the company's members members of the LLC are not personally liable or responsible for business debts and liabilities it is usually best to enter into the LLC operating agreement when the LLC is already formed main provisions in an LLC operating agreement an LLC operating agreement should include pre amiable the preamble dates and defines the agreement and includes the place of formation of the LLC operating agreement recitals recitals provide the basic information of the company for example when and why the LLC was formed if it is being formed as part of a larger transaction such as a joint venture or if the LLC operating agreement is being amended and restated definitions the LLC operating agreements can be long documents so it's a good idea to define the terms that are commonly grouped together for clarity organization matters this section includes the background details about the LLC such as the name addresses of the members when the LLC was formed the LLC's registered agent and the locations of its principal office the term of duration of the LLC and the LLC's business purpose members and LLC interests this section of the agreement includes matters relating to the members of the LLC and their LLC interests this section also provides information on any additional members and their liability management LLC's are managed by either one of its members called a managing member or by a separate manager on a board of managers managers are responsible for strategic decisions and the day-to-day running of the business capital contribution a capital contribution is the invested money or payment that a member makes to the LLC in exchange for its LLC interests in addition to identifying each member's initial capital contribution to the LLC this section usually includes other provisions relating to the capital contribution such as obligations to make capital contributions how additional capital contributions are called in what is known as a capital calls provisions governing member loans to the company the consequences of a default on a mandatory capital contribution LLC termination LLC operating agreements usually set out the different ways the LLC can be dissolved and the related procedures for dissolving and winding up the company's affairs specific dissolution events and the winding up processes vary among LLC's but these sections typically share similar concepts an LLC can be terminated when the expiration of a specific term established in the LLC operating agreement has been reached by the consent of all or some of the members a decree of dissolution or the sale of the company allocations and distributions are set out in the LLC operating agreement profits and losses are allocated among the members and how and when the company funds are actually distributed to the members what is to wind up an LLC it means to resolve and settle all of the company's liabilities and obligations close the business and sell all of the assets
Thanks for your comment Hiram Kihn, have a nice day.
- Benjamin Pesantes, Staff Member
so I'd like to talk a little bit about what should be included in a partnership agreement now I mentioned in the last video that I have a little process that I take people through where I tell them these are the things that should be in a partnership agreement and here's some ideas about how you might want to address those things how you want to cover them and I'd like to just give you a general idea now about what ought to be in a partnership agreement and and why those things need to be there so I'm gonna do this quickly I'm not going to go through all the options that's what we do in the meeting so if you're interested in that process reach out to me the website is in the section below and you can see where the website is and and contact information from me I have a process that's very inexpensive where we sit down with all the partners and we talk through the provisions that need to be in a partnership agreement and the provisions you want to add and I'll give you some ideas and recommendations and help people work through agreements and and then we draft a memo and you've got a partnership agreement so excuse me for using notes here because I don't want to forget anything but let me give you some notion of the things that need to be included in your partnership agreement the the first thing that needs to be there is the initial contribution of the partners so Joe Blow and I are starting a business together we're gonna be partners I'm putting up $5,000 Joe only has a thousand but he's gonna work hard for the first six months and get everything running and I'm not gonna work I'm gonna just keep going on my job and he's gonna work and not be paid and that'll be his offset for that 4,000 we need to define that we need to say I put in five he put in one plus labor okay so you want to define everybody's contribution if everybody putting in $10,000 who want to say that if there's some you know other form of contribution we want to say that so we want to get that really clearly laid out the next thing we want to define clearly in our partnership agreement is the distribution of equity or ownership is this a 50/50 partnership if so let's say it let's say that I am a 50% then Joe is 50% is 50/50 equal partnership let's get that laid out a lot of the disputes I deal with when people call me for mediation have to do with that very thing they say well we started out and it seemed like equal but he's not doing his job and I think it ought to be 60/40 and pretty soon people are in a fight if you have it laid out in a document that both parties or all parties if you have more than two partners in the business if if that's all defined and laid out that dispute isn't gonna come up because you have it in writing it's etched in stone nobody's gonna dispute it so I highly recommend that provision what do you do if additional capital is required so I put five Joe puts in a thousand and works two years from now we find out that we're not going as well as we thought we should and I've got to put in another ten thousand dollars do I get more equity or is that alone or how do we treat additional capital that's something we really want to talk about and define in there so that when it comes up and it will and most new businesses have various rounds of money that they need to race so when it comes up that they need additional capital how are we gonna treat that okay the next thing I want to include is how do we make decisions so there's Joe and I do do I make all the decisions regarding finances and Joe makes all the decisions regarding marketing or are all the decisions made by both of us and a vote how is that process in the business that'll prevent us from getting in a dispute that you know I'm never part of things you made that decision without talking to me I was excluded from that or hey that's my job and you're interfering with it it cuts out all that stuff so it's good to get defined how our decisions going to be made in the business okay what happens if there's a tie what if I say I think we need to expand the business there's a billion across the street for sale I think we ought to buy it you say definitely not I think the business is perfect the way it is I don't want to expand how do we break it tie do we flip a coin do we get a Ouija board does does my vote outweigh your vote if there's a tie or do we get a third party or do we mediate it how are ties decided in a 50/50 partnership you need a method for breaking ties and if you document it put it in writing it'll help you what are the partners responsibilities who does what what what is Joe going to be responsible for this is something that comes up a lot people call me all the time and they say look I'm doing all the work I do the sales I do the marketing I do the books I do all the administration I take care of the customers he's not doing anything you know and then I talk to Joe and and I find out that his job is maintenance and he says well nothing broke this month so I didn't have anything to do and he won't let me do anything because he always interferes and you know that kind of stuff so it's good to define what the responsibilities of the partners are I like to add something about how disputes are handled so if we disagree not just breaking ties on votes but if there's a dispute if we get angry at each other how do we decide that is that we just let it go or do we vote it and then go to that process or do we have a clause in there that says if there's a major decision we can't agree and it gets to a dispute where we're actually in sort of a hostile position we go to mediation and I've seen that and a lot of ship agreements so we need to put something in there about how we handle this agreement and it may be just you know we take turns letting go every other month you know if it's an odd number month I let go and the even number month you let go or you know something like that it can be however you agree then we have to talk about how we're gonna get paid are we gonna take a salary plus distribution of profit are we just gonna say we're each going to take a flat amount 500 a month for the first year and then after that we're gonna just split profit evenly or you're doing most of the work so we're gonna split the profit 6040 how are we gonna deal with money how are we gonna be paid how do we decide when people get a raise how do we distribute profit that all needs to be decided then you have the life events that happen death what happens if one of us dies does that suddenly does Joe's wife become my new business partner and I have to deal with her and she never liked me in the first place and now I've got a business partner that's hostile what happens what happens if a business partner dies do we fund that with life insurance or do we just say well sorry Charlie now whoever survives owns the whole business what do you do what about disability what if a partner can't work for a year or two years you know they're in a serious accident they can't work do you keep paying them or do you get angry and say I'm not paying you another dime or how do you deal with that having it figured out in y
Thanks Letitia your participation is very much appreciated
- Benjamin Pesantes
About the author
I've studied cultural psychology at Holy Apostles College and Seminary in Cromwell and I am an expert in american literature. I usually feel high. My previous job was artists agent (manager) I held this position for 24 years, I love talking about lapidary and sneaker trading. Huge fan of Donny Miller I practice trapeze artistry and collect artist trading cards.
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