The Operating Agreement establishes, among other things, the management structure of the LLC and the economic rights of the owners. In an LLC, owners are referred to as "members" (as opposed to shareholders in a corporation), and their ownership interests are referred to as "membership interests" (as opposed to shares of stock in a corporation).
Ownership Percentage Designation
Our Operating Agreement considers that the membership interests in your LLC will be expressed as percentages, which reflect the relative capital contributions of the members. When completing our Tutorial/Questionnaire, we will ask you to provide the respective ownership percentages and capital contributions for yourself and any other members, to ensure that we set up your LLC in accordance with your desired business arrangements.
Management Designation
The UpstartLegal.com form Operating Agreement assumes that your LLC will be managed by majority vote of the members as a group, based on their percentage ownership. Accordingly, if you are the sole member, then your 100% membership interest obviously constitutes a majority of the members. If there are two 50/50 members, then both of them must consent under this structure. If there are multiple members, then so long as you retain greater than 50% membership interest, you will control the management of the LLC.
Alternative management structures are available. For example, the agreement may provide that you will have exclusive control of the LLC even if there are other members (i.e., they won't have the opportunity to vote, notwithstanding that they are owners). Or, it may provide the minority percentage members with veto rights over certain significant actions of the company. If you are interested in these provisions, please contact us.
Allocations and Distributions of Profits
In addition to any regular compensation for their work on behalf of the LLC, the members are entitled to any net profit that the company may produce. The UpstartLegal.com form Operating Agreement assumes that profits and losses of the LLC will be shared among the members, if there are more than just you, on a pro rata basis in accordance with their ownership percentages in the LLC.
Indemnification Provisions
Companies frequently agree to indemnify, with some exceptions, the members and management of the LLC against certain costs they may incur as a result of their participation in the LLC. More specifically, the LLC will often cover defined litigation costs and damages of its members, managers, employees and officers that they may face personally as a result of decisions they make, or work they do on behalf of the company. The UpstartLegal.com form Operating Agreement includes a standard set of these indemnification provisions, though certain states have laws that may limit the circumstances under which they may apply.
Transfer of Ownership Restrictions
Because we assume that all of the members of your LLC will either be active in the business or "relationship" investors, our form Operating Agreement prohibits each of the members from transferring their membership interest without the prior consent of the other members. This prohibition has the effect of keeping the company and its business together without unwanted or unapproved participants. This also forces a member who desires to exit, whether voluntarily or otherwise, to do so in a way that is satisfactory to the other members. If you prefer free transferability (i.e., the right to sell or gift membership interest to anyone without the consent of the other members), please contact us.
In most small businesses, the members want to provide for the purchase of an exiting member's interest on certain events. Typically, these are events where the member can no longer be active in the business or does or experiences something that adversely affects the member's rights (breach of the Operating Agreement or any other agreement with the Company, death, disability, failure to provide adequate time and effort to company, etc.). As a consequence, the company has the right or obligation to buy back the membership interest of the member. The UpstartLegal.com form Operating Agreement includes these buyout provisions. The company will pay $1.00 for a purchase in the event of a materially adverse action by the member or the member's breach, or if the member quits working for the business. The company will pay an appraised value, over a time period, in the event of a member's death or disability.
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