Liability and the Operating Agreement

The popularity of LLC's arises from its simplicity and the traditional "corporate veil", protecting individuals from personal liability. It's a streamlined business entity, eliminating layers of bureaucracy. The LLC has "members" who interact in much the same way partners would, sharing in profits based upon their "membership interests". For example, A, B, and C are LLC members. If A has a 25% membership interest, B 40%, and C a 35% interest, two members having more than 50% membership interest must agree upon policies. Members receive profits according to their percentage interests. No member is generally subject to personal liability. Let's explore some provisions, found in an Operating Agreement. Sometimes it is preferable to have the business managed by a professional. In this instance the Operating Agreement provides for a manager-managed entity. In most cases, members collectively manage the business, appointing a managing-member to implement policies.


Death and Withdrawal

Two critical issues often overlooked deal with the right of the LLC to repurchase a member's interest upon death or withdrawal, and its purchase price. Many clients prefer that the Operating Agreement contain a "right of first refusal", requiring that all membership interests be offered for sale to the LLC before they can be sold to a third party. Valuation can be derived in many ways depending upon philosophy. Arms length partners typically choose an objective appraisal method, whereas family members sometimes opt for restrictive valuations based upon adjusted capital accounts. A Limited Liability Company can provide small businessess with many legal and tax benefits.