Academic journal article Journal of Accountancy

LLC Operating Agreements

Academic journal article Journal of Accountancy

LLC Operating Agreements

Article excerpt

With the growing popularity and use of limited liability companies (LLCs), many taxpayers are (or should be) focusing their attention on these entities' operating agreements. Because LLCs are relatively new, they do not have the benefit of the extensive legislative and judicial guidelines that exist for other entities. Therefore, operating agreements may be critical, since their provisions will determine whether key issues are properly addressed and the desired tax treatment achieved.

Since the existence and availability of LLCs are based on state law, states have also determined rules for their operations. Often, however, LLCs may establish their own rules and procedures, and the state provisions go into effect only if the LLC does not otherwise specifically address a circumstance or situation.

Note: While an LLC's articles of organization can include most (if not all) of the basic provisions of the LLC's operations, there may be reasons to restrict the articles to the minimum information required by law.


Formation and capital. The first issue is the types of contributions LLC members can make. Generally members contribute cash, but the LLC may permit contributions of property, services or loan guarantees. The agreement should indicate whether noncash contributions will be allowed, set any limits on the amount of such contributions and provide a valuation method. In addition, the agreement should address whether the LLC permits or requires additional capital contributions and how to deal with members who cannot (or will not) make them.

Member voting rights should also be considered. While state laws generally provide for voting based on contributions, an agreement can base it on other means, such as capital balances or capital contributions.

Operational issues. Operational issues include management and economic issues.

The most basic management issue is whether the LLC will be managed by members or outside managers. Once that is determined, an agreement should address the specifics of this management, such as the consent needed for daily operations; the number of individuals on the management team, their compensation and enumerated duties; limits on the authority of the manager or member to bind the LLC; meetings procedures; indemnification for liabilities arising from the performance of duties; and any limits on self-dealing. …

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