Limited Liability Companies (LLCs) are similar to private limited companies, where the member’s contribution is decided or limited beforehand and his/her liability is restricted to their financial contribution to the company. LLCs have operating agreements which are drafted as per the business needs of the members of the company or its owner.
The LLC operating agreement (operating agreement) stipulates the contribution of each member to the company, including their financial contribution and their managerial and operational roles within the company. It also clarifies the voting rights assigned to each member.
What is a Multi-Member LLC Operating Agreement?
Unlike the single member operating agreement, the multiple-member operating agreement defines the operational and financial terms of companies (LLCs) that include more than one member. “LLC” represents the Limited Liability Company, with the owners being referred to as members. Therefore, the agreement is drafted as per the preference of the members of the LLC or its business owner.
In a single member LLC, the member has complete control over the LLC. However, the LLC is its own specific entity separate from the single member. The multi-member LLC has two or more members and the LLC is a separate entity here as well.
so a multi-member LLC is generally a business with more than one owner. There’s no limit to the number of members an LLC can have, so a multi-member LLC can have two members or it can have dozens.
When Do I Need a Multi-Member LLC Operating Agreement?
An operating agreement must be entered into after the incorporation of the LLC. However, such an agreement does not need to be filed with the documents for the incorporation of the LLC, nor does it need to be disclosed to the public.
In the case of a multi-member LLC it would be advisable to begin negotiating the terms of the operating agreement prior to the incorporation of the LLC. Negotiations of an operating agreement are crucial to interpreting and understanding the operating agreement. Therefore, a business owner or member must carefully discuss all terms of the agreement in negotiation.
What Is Included in a Multi- Member LLC Operating Agreement?
A multi-member operating agreement will generally include terms such as:
Structure of the Company:
The purpose of the company, the date of the incorporation and the address of the company are a few details that you can find within the first part of the operating agreement. This also includes the names of the present members of the company.
Percentage of Ownership:
The agreement will provide (i) the financial contribution of each member of the company, (ii) the percentage allotted in the shares of the company and (iii) the methods by which profits and losses will be distributed between the members.
The operational role of a member can determine the agreements that they can create with third parties: such as agreements for taking a loan for the LLC or creating any third party rights over any asset of the LLC. The responsibility of each member must also be detailed in the agreement.
The amount of financial contributions do not necessarily amount to proportional voting rights in the company and the same will be decided amongst the members and recorded within the agreement.
The regularity of meetings between the members of the LLC and the agendas to be covered by such a meeting shall also be recorded.
Dissolution of the Company:
Upon the winding up of the company, the distribution of the assets of the company amongst its members will be mentioned at the end of the agreement.
Difference between a Single-Member LLC and a Multi-Member LLC
A multi-member operating agreement is signed between members of the LLC (when there is more than one member). Such an arrangement is akin to a partnership agreement. The difference between a partnership and a multi-member LLC arises from the limitation of the liability of the LLC members. There can be any number of members in an LLC.
A single member LLC operating agreement is between the single member and the LLC itself. Such an arrangement is like a sole proprietorship, with the primary difference also arising from the limitation of liability of the single member.
A single member LLC operating agreement must include a clause for the introduction of a new member. It is possible for single member operating agreements to be changed to multi-member operating agreements upon the expansion of the LLC and its business.
The following points must be kept in mind:
Is it necessary to have a multi-member operating agreement?
It is not legally required by states (except for Delaware, Maine, California, New York and Missouri) to create an operating agreement. Certain states also accept oral and written operating agreements, although it is strongly advisable to have a written agreement itself.
While the operating agreement may not be a legally required document, it is an essential component of conducting the affairs of an LLC smoothly. It ensures that any conflicts between members and mismanagement of the company in the future is governed by and corrected with the assistance of the operating agreement itself.
What is the difference between a member-managed LLC v. a manager-managed LLC?
A manager of an LLC is elected by the members to enter into contracts on behalf of the LLC. Such a member can open a bank account on behalf of the LLC, borrow money and hire contractors and buy and sell real estate in the name of the company.
A member-managed LLC is when all the members of the LLC have the right to operate the LLC as its manager. However, in a manager-managed LLC, only the manager can perform the aforementioned functions.
The creation of a manager and his rights can be included within the operating agreement. A manager need not be a member and can be an external party. Most LLCs however are member-managed LLCs.
Is it necessary for me to enlist a lawyer for an operating agreement?
Modifications to an agreement which only change the address, dispute resolution clauses and other ancillary provisions to the agreement can be altered by an agreement between the parties.
Substantial changes to an operating agreement, such as the introduction of a new member or a change in the financial contributions of the company require the assistance of a lawyer as well as an accountant.
Operating agreements define the relationship between members of the companies to each other, as well as the relationship between the members and the company itself. It is therefore important to sign well drafted operating agreements which safeguard the interests of both the company, as well as its members.
If you are looking to enter into an operating agreement for your LLC, CocoSign has templates for different Multi-Member LLC Operating Agreements along with templates for different LLC Operating Agreements as well.
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