The Limited Liability Company (LLC) business structure is one of the most flexible and simple business entity types that entrepreneurs may choose. LLCs aren’t usually required by states to have an LLC partnership agreement; however, it’s something to consider–especially when an LLC will have multiple owners (a multi-member LLC).
What Is an LLC Partnership Agreement?
An LLC partnership agreement (also called an LLC Operating Agreement) lays the ground rules for operating a Limited Liability Company and protects the legal rights of its owners (called members). It’s written by the LLC’s members and describes the plans and provisions for the company. After an LLC’s members have finalized their LLC partnership agreement and all of the LLC’s members agree on the terms and conditions, all of the members must sign it to make it official. The LLC partnership agreement must then be kept at the place of business to ensure that members run the business according to the LLC’s business compliance formalities.
Setting Up Agreements
An LLC partnership agreement is a legal document, so it’s smart for entrepreneurs to get an attorney’s advice when setting it up. Many LLC partnership agreement templates are available online, but realize that most are generic in nature and don’t address all of the details that may be unique to an LLC.
Fortunately, businesses and CorpNet partners (providing our services through the CorpNet Partner Program) can order a custom LLC partnership agreement through CorpNet. It’s a wonderful way for businesses to save time and money, and for CorpNet partners to generate additional revenue. I’ll explain more about that later.
Core Elements of the Agreement
Let’s take a look at some of the items that LLC Operating Agreements often include. Below is a list of many of the key ownership, administrative, and operational areas that an LLC Operating Agreements addresses.
1. Basic Information About the Company
Some basic provisions typically contained in LLC Operating Agreements include:
- Name of the LLC.
- Principal business office address.
- Initial registered agent’s address.
- Statement of intent – Essentially stating that upon filing official documents with the state, the LLC will be in existence.
- Statement of purpose – Describing the nature of the business activities to be conducted by the LLC.
- Term of the LLC – Most LLCs continue until terminated as set forth in the operating agreement or until dissolved according to the laws of the state. Some, however, may be formed for a specific duration or until an event has occurred (for example, a construction project or sale of a building or property).
- Income tax election – Identifying the tax treatment decided on by members (e.g., sole proprietorship, partnership, corporation, S corporation).
- Names, addresses, and titles of members (and managers, if applicable)
- Capital contributions of members – These may be in the form of cash, services, or property.
2. Members’ Ownership Interests
An LLC Operating Agreement states how much of the business each member owns. Often, LLCs assign members’ a percentage of ownership according to the percentage of the total funds they invested in the business. However, in some cases, that might not be the fairest way to handle it. For example, in a two-person multi-member LLC, one member may have invested 75 percent of the start-up capital, but the member who only put up 25 percent of the money might be the one handling most or all of the work running the business. Under those types of circumstances, LLC members might agree to split ownership more evenly than using the monetary contributions as the sole basis for determining ownership percentages.
LLC ownership can be expressed as a percentage of ownership interest or as membership units (similar in concept to shares of stock in a corporation). Also, an LLC may have different classes of membership interests so that it may allocate profits and voting rights in a specific way.
3. Profit and Loss Allocations to Members
LLC Operating Agreements also include how company profits should be distributed among an LLC’s members. Unlike traditional corporations, an LLC doesn’t have to divide its profits in the same proportions as members’ ownership percentages. LLCs offer flexibility in how business profits can be split. Often, LLCs do opt to divvy up profits according to members’ percentage of ownership. However, it does not have to be that way if members decide that a different arrangement makes more sense for them.
4. The LLC’s Management Structure
A Limited Liability Company may be either “member-managed” or “manager-managed.” The LLC Operating Agreement should identify which method the members have agreed on.
In a member-managed LLC, members handle the company’s everyday management and operations of the company. Individual members have the authority to make certain decisions that affect the company. Usually, significant decisions, such as entering into contracts or loan agreements, require majority approval among members.
In a manager-managed LLC, one or more members (but not all members), one or more non-members, or a combination of members and non-members assume a “manager” role in the organization. Managers run an LLC’s business operations and have day-to-day business decision-making authority (such as writing checks and hiring employees). While members who are not in the role of “manager” usually don’t get involved in operational decisions; typically they do handle high-level decisions such as entering into mergers, obtaining loans, and other strategically significant activities.
An LLC partnership agreement should clearly define members’ and managers’ roles and responsibilities so that everyone is on the same page and understands their obligations and the authority each individual has.
5. Meetings and Voting Procedures
LLC partnership agreements usually state when the business will hold its member meetings and the rules of how voting will be handled. Among the things to address are:
- How many members must be present for a quorum (the minimum number of members attending to make the proceedings at the meeting valid)?
- How many votes are necessary to approve an action (e.g., a majority or unanimous result)?
- Will each member have one vote regardless of their ownership interest, or will their voting power be proportional to their ownership percentage?
6. Compensation of Members for Duties Performed
If the LLC will pay members for their work in operating the limited liability company, it’s helpful for the LLC partnership agreement to describe what they will be paid for and how much they will be paid.
7. Rules for Adding and Removing Members
It’s critical to plan for growth and change in an LLC. An LLC partnership agreement can help by stating how new members can be admitted to the company and how ownership interests will be distributed when that happens. And, if any members decide to leave the business or pass away, the LLC Operating Agreement will address what will happen to their ownership interests.
For example, an LLC partnership agreement may determine that if a member leaves the LLC voluntarily, that member must offer his or her ownership interest to the other members first before looking for someone outside of the organization to buy them out. Other situations a thorough LLC partnership agreement will address are if a member files for bankruptcy or gets a divorce. It’s important to identify what should happen to ownership interests under those circumstances, as well.
8. Dissolution of the Company
LLC members might decide to close the business because they’ve been tremendously successful and want to retire or because they’re struggling and choose to cut their losses and go out of business. Either way, there needs to be a process that all members agree on. Typical LLC partnership agreements include steps that should be taken when dissolving the LLC. They also explain how the LLC’s assets should be distributed to members after the business’s debts are paid. Hopefully, your LLC will be a success and you won’t have to worry about this unless it’s on your terms!
CorpNet Can Help You Get Started
CorpNet is here to help entrepreneurs and business owners. Through CorpNet’s partner program, we can assist accounting firms, accountants, CPAs, and legal and tax professionals as they help their clients set up and manage their LLC partnership agreements.
We do the lion’s share of the work for you, which means you spend less time, energy, and expense getting your business off the ground.
Business owners, place your request with us to form your LLC and get your custom LLC Operating Agreement.
Accountants, CPAs, attorneys, and tax professionals, sign up for the CorpNet Partner Program. Earn additional revenue as you help your clients start their LLC s and handle details, including their LLC partnership agreement.