What Belongs in an LLC Operating Agreement? (Part 2 of 3)

This is part two of a three-part series on what does and doesn’t belong in a written LLC operating agreement. Part one can be found here.

In part one of this series, I raised five questions that should be addressed in your LLC operating agreement. Here are five more.

More terms that usually belong:

Will there be meetings? One of the nice things about LLCs is that they are flexible, meaning that LLC members have a lot of leeway in choosing how the company’s affairs are conducted. Meetings typically aren’t legally required, but I recommend at least an annual in-person meeting of the members and/or managers (preferably both). I prefer quarterly meetings if circumstances allow it. It is common for companies to focus on their immediate business objectives and ignore regular company meetings. This is dangerous in my view; the benefit of regularly scheduled company meetings that focus on addressing overall company issues can’t be overstated. Include the details of your company meetings in your LLC operating agreement.

What happens when the company needs money? Underestimating the amount of money a new company will need is an epidemic. It is a rare exception when a venture gets its funding numbers right on the first try. Accordingly, the operating agreement should have a process in place to address a cash crunch. You may want to allow for a “capital call”, which requires some or all of the members to contribute more money under certain circumstances. You may want to allow members to loan the company money under pre-determined terms. Whether you include one of these ideas or some other creative approach, I recommend addressing cash needs in the operating agreement.

Who will handle tax matters for the LLC? This one is pretty straightforward – specify by name in your operating agreement the LLC member who will be responsible for tax matters. This includes making sure tax returns are prepared correctly and on time and dealing with correspondence from the IRS or state tax authorities.

What happens when someone dies? This is one of the questions I get asked most often by clients when helping them structure LLCs. There are other related questions you should consider too, like what happens if a member goes bankrupt or becomes mentally incompetent or just doesn’t want to be part of the LLC anymore. Typically what happens in these types of situations is the company (or the other members) have the opportunity to buy the member out. Capturing this in an LLC operating agreement requires you to answer at least two fundamental questions: (1) what events (death, bankruptcy, etc.) trigger the company’s option to buy the membership interest, and (2) how do you determine how much the interest is worth?

What if we want to dissolve the company? Dissolving an LLC isn’t always as simple as you think. There are steps that must be taken first to “wind up” the affairs of the company. The operating agreement should contain instructions on how to dispose of the company’s assets. Documents must be filed with the Secretary of State. Make sure you don’t forget to address these points in the operating agreement.

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