The purpose of this post is to provide investors with some guidance in creating their LLCs. So far, I have covered three of six points that in my experience have created the most problems for LLC owners. These six in and of themselves are not an exhaustive list, but a good start toward creating an agreement that will meet your expectations. Here are the reaming three clauses:
4. Restrictions of Transferability of Membership Interests
Your LLC operating agreement had better limit a member’s right to transfer his interest lest you end up in a partnership with someone you do not know. Your operating agreement should provide that transfers to anyone other than a spouse or living trust will require the unanimous approval of all members. In my operating agreements, I sometimes permit transfers to wholly owned business entities without membership approval. Furthermore, certain provisions can be included to protect the company in the event of a member’s bankruptcy, divorce or death. These provisions ensure your business remains in the hands of those whom you know and trust.
5. Tailor the LLC Operating Agreement to the Deal
Far too often I see operating agreements that are hardly more than photocopies of some form document with a few names and addresses inserted. These agreements show little or no awareness of the myriad of specific and unique issues that every LLC deal inevitably involves—for example, special issues regarding dissociation events, buy-sells, fiduciary duties or voting rights are often overlooked. Another area that should be addressed is taxes. Most form agreements provide for partnership taxation. This is fine provided there are at least two owners and they have agreed to have the company treated as a partnership for federal tax purposes. However, in my experience, LLCs are often established with only one owner in which case partnership tax status is unavailable to the LLC. As a result, business owners come to me with an operating agreement that is in conflict with federal tax law and/or their federal tax election. The result could be disastrous in an audit.