Draft industry-specific LLC agreements
Limited liability company operating agreements are not one-size-fits-all.
Adapting a real estate development LLC agreement to a technology company’s needs, for example, is likely to result in critical omissions and inappropriate provisions.
Joseph W. Boucher’s Drafting LLC and Partnership Agreements gives you the tools quickly and effectively create custom operating agreements. In addition to 21 complete operating agreements for 12 different industries, each agreement is annotated with provision-specific suggestions like:
Purpose. “Specifically defining the purpose of the Company can help to avoid potential future conflicts of interest among members and the Company. Members will always owe a fiduciary duty to the Company (unless contracted away in the Operating Agreement). Therefore if members anticipate additional businesses in the future, a purpose statement can be used to protect the future interests of both the Company and the individual members at the Company’s outset.”
Approved budget. “For companies with members that are not involved with the day-to-day operations of the business, the use of a budget provision can act as a means for the more passive members to monitor the company’s progress. The use of a budget provision also allows the members to have control over a manager who has great latitude in day-to-day decision-making on the Company’s behalf.”
Transfer of units. “The restrictions on transfers of interests are a critical section of the Company’s operating agreement. Review the different options or limitations with the parties to ensure that the parties understand the nature of the acquired interest and generally the lack of a public market for LLC interests. Frequently, it is useful to restrict transfer of interests in the initial years of a company to assure the relationships that the initial members’ bring to the Company are protected from the whims of one member.”
Right of first refusal. “Review the purchase method with the members. By using a combination of cash and a promissory note, a member buying out another member’s interest can restrict outsiders from becoming members of the company without requiring a large immediate cash outlay. However, if a company has (or will have) extensive cash reserves, one lump payment will allow the company to move on from a disgruntled member immediately.”
Purchase price determination. “It is important to address the methods of valuation of the Company with the owners. The owners need to understand how their ownership will be valued in the future, and have a comfort level with the valuation process. It is easier to address the valuation process at the beginning of the member’s relationship with the Company, as opposed to when a member is trying to terminate the relationship. Due to the difficulty in determining a valuation when members have had a falling out, the use of an independent valuation (in the absence of previously agreed upon valuation of the Company) can be an effective but costly solution.”
Small construction LLCs
Treatment of member loans. “The loan provision in this sample is useful to include in construction entities. Often, the member will need to outlay personal cash for materials used on various jobs. By specifying that such activity constitutes a loan rather than a capital contribution, the Company’s obligations to repay debt compared to distributions of profit is clearly outlined between its members.”
Major actions. “Pay careful attention to this provision if one or more members are inactive. If so, then the inactive members may wish to restrict activities that may be performed without his or her consent. For example, an inactive member could be a parent who has retired or a sibling who is not longer active in the Company.”
Joint ventures
Administration of joint venture. “By sharing the decision-making process amongst the two joint venturers, the Construction Manager is able to exercise his or her authority on the project site without the concern that one entity’s workers are receiving preferential treatment due to any company ties to the Construction Manager.”
Reassignment of administrative functions. ” When forming the joint venture, the drafting attorney must consult with the client to determine whether it is more efficient to have one company handle the administrative work, or if each company should handle different aspects of the administrative work to spread the responsibility among both parties.”
Failure to make advance payment. “Including the advance payment provision in the agreement will allow the project to move forward despite any short term financial hardship suffered on the part of one of the joint venturers. Also, each member should coordinate with its bonding company to ensure that the project will be properly bonded.”
Prohibition of transfer of member interests. “For short term projects, the drafting attorney should consider discussing restrictions on transfer of interests by members with the client. Bringing in an additional party or attempting to assign membership interests can cause costly delays in a construction project. Generally, members in these short-term entities are “locked in” for the project’s duration.”
Wholesale LLCs
Capital contributions of members. “Many wholesale companies have members that make capital contributions to the entity in the form cash and or commercial storage space due to the capital intensive startup costs. Another form of initial capital contribution that a member may make is to provide credit for the Company so it may pay overhead expenses such as rent, employee wages, and costs for inventory. In any entity it is important for the members to understand capital contribution expectations from the start.”
Distributions of available cash. “Discuss limiting the members’ ability to make withdrawals and receive distributions in a wholesale LLC. Wholesale companies will often need to maintain proper cash reserves for purchasing additional or new inventory lines. By limiting members’ abilities to demand repayment of capital contributions and/or distributions during the infancy of the company, the wholesale business will be able to focus its efforts on sales and operations.”
Purchase price determination. “It is important to address the methods of valuation of the Company with the owners. The owners need to understand how their ownership will be valued in the future, and have a comfort level with the valuation process. It is easier to address the valuation process at the beginning of the member’s relationship with the Company, as opposed to when a member is trying to terminate the relationship. Due to the difficulty in determining a valuation when members have had a falling out, the use of an independent valuation (in the absence of previously agreed upon valuation of the Company) can be an effective but costly solution.”
Drafting LLC and Partnership Agreements
