A multi-member LLC operating agreement is a legal document that contains the agreed-upon ownership structure and outlines the governing terms for a multi-member LLC. Aside from that, it stipulates in vivid detail each member’s powers, roles, and responsibilities. It also helps to explain financial and working relations between the members and business managers.
What is a Multi Member LLC?
A multi-member LLC also known as an MMLLC is a limited liability company with two or more members. Note that this sort of LLC operates as a legal entity separate from its members, and this also entails that members get protection from the LLC’s risks and debts liability.
Have it in mind that members of MMLLCs can be individuals, corporations, or even other LLCs. The contents and form of an LLC operating agreement will vary widely from one company to another.
However, most will have certain important sections: basic entity details, organization, voting, management, capital contribution, membership changes, distribution, and dissolution. Aside from that, this contract also determines ownership stakes and the voting rights and how decisions are made, coupled with other structural features of the LLC.
Things Included in a Multi Member LLC Operating Agreement
Things expected in a multi-member LLC operating agreement include;
Table of Contents
- Article 1: Company Formation/Articles of Organization
- Article II: Capital Contributions
- Article III: Management and Voting
- Article IV: Distributions
- Article V: Membership Changes and Transfers
- Article VI: Dissolution
- LLC Ownership Shares
- Defining Each Member’s Responsibilities
- Defining The LLC’s Management Structure
- Dividing Profits And Losses
- Adding Or Removing Members, Transferring A Member’s Interest, And Withdrawal Clauses
- Dissolving The Company
Article 1: Company Formation/Articles of Organization
Renowned as the first part of the operating agreement, it is meant to deal with the formation of the company. It will contain information on when the LLC was established, a list of members, and an ownership structure. Aside from that, it will also note if the members have equal or different amounts of ownership. This section is known to carry out four major functions:
- To carry out lawful business.
- It explains critical business information such as the members’ information, registered agent, and business address.
- Outlines events under which the LLC business can be terminated and how members can continue the LLC.
- It describes how the LLC can add new members.
Article II: Capital Contributions
Since every member of a multi-member LLC is expected to make initial capital contributions by funding the LLC with cash or other assets in exchange for ownership interest, have it in mind that this section will note the total value of all contributions. This section of the operating agreement will have to explain that members are not obligated to contribute more later on.
Article III: Management and Voting
Part of the operating agreement will deal with the issue of managing the company and how each member will vote. Have it in mind that the company can be member-managed or manager-managed, with a well-detailed system of appointing managers and how individual members will be assigned other specific duties.
Additionally, it will have to note that every member of the LLC still retains the authority to make LLC decisions, with any legally binding agreement signed by all members. It is also meant to disclose the consequences that come with any member’s inability to carry out their duties.
In addition, this section will explain that members aren’t held responsible for LLC’s losses, damages, or expenses, and other actions against the LLC as long as they were done in good faith.
The members may also decide to make the LLC decisions through a voting process. This section will then have to explain how votes are allocated, with the majority vote deciding disputes. The agreement will also note the number of votes necessary for particular actions.
Article IV: Distributions
This part of the operating agreement outlines the annual determination of gains and losses, stating if the distributions are annual or more often. It also explains how profits and losses made by the LLC will have to be shared owing to each member’s ownership percentage, and this comes in the form of a physical asset, money, or other business assets.
Also note that this part of the agreement will have to note that if the company or membership interest is liquidated, distributions will have to follow Treasury Regulations.
Article V: Membership Changes and Transfers
The section will have to discuss how the LLC will go about removing or adding new members. It will also note if and when members of the LLC can transfer their ownership in the company. It will explain the process that will take place in the event of death, bankruptcy, or divorce. The section will be expected to see three major issues:
- How members can buy out the interests of a member who wants out.
- How to determine the value of the member’s interest who wants out.
- What happens should a member want to exit, but there is no buyer for their membership interest.
Article VI: Dissolution
This part of the agreement will have to outline the circumstances under which the LLC may be dissolved and also the process of terminating the LLC should all the members vote to end it. This section will also have to note that the LLC is tasked with paying all its debts before making distributions to members upon dissolution.
Important Components and Clauses in a Florida Operating Agreement
Once the company is registered, the next step is to prepare a detailed operating agreement. Important components and clauses to consider in the agreement include;
When preparing an operating agreement, the members are expected to explain in vivid detail the specific membership interest of each individual involved. Unlike corporate business structures, LLCs give room for members to own different types of membership interests, and this could result in different rights for members depending on their ownership interest in the company.
Once the ownership share of each member in the company has been expressly defined, the operating agreement is meant to specify the types of membership interests and the membership rights associated with them.
Defining Each Member’s Responsibilities
In the state of Florida, have it in mind that members of an LLC have a fiduciary duty of care and loyalty to the company and its fellow members. Coupled with the default statutory rules, it is imperative to leverage the company’s operating agreement to waive or modify each member’s responsibilities within the company.
Defining The LLC’s Management Structure
This is another important component to include in the operating agreement especially since it helps to determine whether an LLC is “member-managed” or “manager-managed.” In a member-managed LLC, the company is governed by one or more of the business’s members (owners).
Meanwhile, a manager-managed LLC is governed by one or multiple managers whose authority is stipulated by the members. Once the company’s management structure has been determined, it is pertinent that the document includes provisions to dictate:
- The manager’s duties and responsibility
- The management limitations imposed by the document
- What should be done in the event a legal dispute arises within the company
- The specific procedures to remove or replace a manager
Dividing Profits And Losses
Have it in mind that no operating agreement can exist without explicitly explaining the division method used by members to distribute the company’s profits and losses among them. It is also important that the agreement properly defines how distributions will have to happen, including the frequency, the amount, and other conditions associated with it.
Adding Or Removing Members, Transferring A Member’s Interest, And Withdrawal Clauses
If for any reason the company is looking to add or remove one of the members, the operating agreement is expected to outline the required process to avoid legal disputes and very tiring situations. In a situation where one of the members of the LLC is obligated to leave the company or chooses to do it voluntarily, the operating agreement is expected to provide:
- When membership interest transfers are allowed
- How membership interest should be transferred
- What a member should do to withdraw from the company
- Conditions or restrictions on the withdrawal right
- The existence of buy-out clauses or any similar provisions
Dissolving The Company
Finally, an operating agreement is expected to include provisions to explain the sort of events that may trigger the LLC’s dissolution, how members will have to go about dissolving the company, how to share the LLC’s assets, and to close the company legitimately.
A good number of states in the United States require both multi-member and single-member LLCs to have an operating agreement. Howbeit, even if your state doesn’t mandate businesses to create an operating agreement, every multi-member LLC should create one as soon as the LLC is established.