Between you and your own limited liability company there are only the articles of organization and the LLC operating agreement. The LLC operating agreement defines the basic rights and responsibilities of LLC members (and managers, if you want to form a manager-run LLC). You do not need an LLC operating agreement and can run your company without one, however, it is highly recommended.
We will start out explaining a member-managed LLC. which means that the members of the LLC will end up managing it. You can have outside managers come in and manage the LLC for the managers. This model is called a manager-managed LLC. I will discuss the consequences of a manager-manged LLC later, but let’s get rolling with the standard, normal and easy case of the members of the LLC managing their company themselves.
Capital Account Provisions
These are necessary when profits are distributed to the members not according to their capital contributions. If Tom, John, and Jack each give 400 $ to cover the costs of incorporation and each of them is entitled to one third of the profits, you do not need complicated capital account rules. In other words, if you split profits according to the ratio you originally contributed capital to the new entity, you can forget about these provisions. These rules are a candy store for accountants and lawyers, few really understand them, and everyone is confused.
Right of First Refusal Provisions
What happens if someone wants to leave the company and sell his interest in the LLC. Maybe the other members should get a right of first refusal to buy the LLC interest. The next question is at what value should the other LLC members have the right to purchase the LLC interest ? When should the parting LLC member be paid ? These are very serious and complicated questions. I believe that most people spend too much time on trying to resolve issues that might or not arise in the future. Circumstances change and one cannot predict all possible alternatives. If you cannot agree on this tricky questions, I suggest to go ahead and build a successful business. Most start-ups fail, so if you drafted the wrong “right of first refusal provision” it will be buried together with your company. Focus on the business and address it once again you are up and running. These issues are always difficult to resolve, now is as difficult as in three years. But in three years you at least might not completely waste your time.
We have by far not addressed all relevant issues (and I still owe you some samples and templates). But I hope I have given you the idea, that common law leads further than the law. Do not become flustered by the idea that lawyers, accountants and others who speak in strange languages deal with LLCs and their inner workings on a daily basis. Lawyers and accountants are helpers, support staff. The hero of the whole operation is you: the founder who will show the world how to make money, have fun and be successful. Don’t let the support staff make your busy life even more difficult. Common sense rules.
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