LLC Investor Agreement: Everything You Need to Know
With an LLC investor agreement, it's important to take all the right steps when filing.3 min read
2. LLC Investors Agreement
3. LLC Operating Agreement: Common Provisions
Updated November 4, 2020:
With an LLC investor agreement, it's important to take all the right steps when filing.
LLC Operating Agreements
All limited liability companies are required to have a contract that all the investors sign, which is called an LLC operating agreement. In theory, this operating agreement is the same as the limited partnership agreement that is in charge of limited partners.
LLC Investors Agreement
When going into a business relationship that has shares, or if there already is a business relationship established, an Investors Agreement can help the basic interests be secured. Whether investors back the business or capital is invested, the investors agreement keeps the owners protected. This document should also be used for the following:
- When creating a business and looking for investors through the sale of shares.
- When investing in a company and the shareholders want their interests to be protected.
- To avoid possible disputes among shareholders.
If any arguments happen between investors in the future, the investors agreement will help solve them. This also allows power to be more equally distributed. Minority shareholders can use the agreement to protect their interests. Other names for the LLC Investors Agreement document include Investment Agreement and Shareholders Agreement.
LLC Operating Agreement: Common Provisions
The LLC operating agreement will have information about the members of the limited liability company. It will cover the specific percentage that each member of the company has. Owners are known as members of LLCs instead of stockholders. This is because membership units make up the equity instead of the common stock shares.
The operating agreement will cover how the profit-and-loss allocation is broken down and used by the firm. Unlike a corporation, LLC operating agreements don't require that profits and losses be divided according to ownership. Certain arrangements can be made, such as having one investor be in charge of the burden of all the losses, while another gets a performance incentive based on how the company is doing. This provides flexibility for the owners when it comes to structuring family investment companies and hedge funds.
LLC operating agreements will state under what conditions and how the dividends of distributions are to be paid to members. The agreement can call for dividends sent at the managers' discretion, no dividends, or required, regular dividend payouts.
If the LLC chooses partnership taxation instead of corporate taxation, the LLC will pay distributions instead of dividends. These are taxed differently depending on what funded them. Every year, the LLC is required to give all members a form K-1, which they will file with their personal taxes.
The operating agreements will cover any mandatory meetings that members or managers must attend and schedule regularly. This may include a yearly meeting, a quarterly review, or anything the parties want to be worked out amongst themselves during the modification or establishment of the agreement.
The LLC operating agreements will also put restrictions on the business. The members of the limited liability company can set what authority the managers have. This includes making it forbidden to publicly trade certain types of stock, making sure the company never sells specific products like tobacco, has a specific dollar amount of working capital to decrease risk, and limiting which industries the company can do business with. Anything can be put in the contract as long as it's legal.
The LLC operating agreement also will explain the plan, procedures, and dissolution dates. Some companies only need to be in operation for a certain amount of time. The limited liability company can set a specific termination date in the LLC operating agreement. It can also include terminations that are performance-based, such as calling for the company to end if it doesn't meet mandatory targets for profits, sales, or built-out dates.
LLC operating agreements will include the process of forbidding or handling shares of membership units without getting prior approval from a specific percentage of the other members. This might have details about a guaranteed salary for some managing members. The agreement could also give authority to the managers to let them give "side pocket" allocations so only specific members can participate in acquiring specific assets
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