1. Facts About Limited Liability Companies
2. Overview of an LLC Operating Agreement
3. About LLC Membership Interests

LLC membership is formed by owners referred to as members and has similar aspects to those of shareholders of a corporation. Members are diverse and can be a person, partnership, corporation, association, or other legal entity.

Facts About Limited Liability Companies

Limited liability companies, in most states, are required to be formed and managed by two or more members. This is the opposite of corporations, which can be formed with just one shareholder.

LLCs are unavailable to sole proprietors, and unlike S corporations that allow only a limited number of shareholders, a limited liability company may have an unlimited number of members.

For the most part, state law outlines how the limited liability company will be managed/governed. In most states, an LLC can be managed directly by its members or management responsibilities may be delegated to one or more managers. These managers are usually appointed or elected by members of the LLC.

An LLC may have one or more managers responsible for the day-to-day management and operation of the business. There are things a manager is not expected to do. These include:

  • Using LLC property for their own personal benefit.
  • Competing with the LLC for business.
  • Managers may not engage in self-dealing business opportunities.
  • Managers may not usurp business opportunities from the LLC.

None of these are acceptable unless the members consent to the action being taken by the manager.

Overview of an LLC Operating Agreement

Most LLCs have what is known as an operating agreement. It may be a written or oral agreement that defines the policies and procedures that will govern the affairs of the LLC. The members decide and agree on what the governing procedures will be. The agreement may also be referred to as a member control agreement or as the operating agreement regulations.

Although not all states require an operating agreement, it is recommended that an LLC have a written document detailing the management structure for the company. The agreement typically provides the following information:

  • Procedures for the admittance of new members.
  • Procedures when a member withdraws from the LLC.
  • Outlined procedures for dissolution of the LLC.

Unless the state has restrictions on what an operating agreement may contain, it is up to the members to create the structure as they see fit. The procedures for amending or repealing provisions in an operating agreement is usually handled by a vote of its members.

About LLC Membership Interests

Membership Interest

A member possesses a membership interest in the LLC, which is usually an economic interest only. The membership interest is considered personal property and a member may transfer the interest to a nonmember or to other members at their discretion.

In most cases, membership interest does not include any rights to be involved in the LLC's management structure. If a member decides to assign or sell his or her membership interest to another person, that person receives only the rights to the shares. They may not vote or participate in the operation of the LLC unless they are admitted as new members.

The admittance of a new member varies according to state law and the LLC's operating agreement or its articles of organization. Admittance may require the consent of its members, which must usually be unanimous.

Member Contributions

When members of an LLC contribute capital to the business, they receive a membership interest. Members may contribute property, services, or cash with no minimum amount required. The amount of the capital contributed to the LLC determines that member's financial rights within the LLC as well as their voting rights.

The profits and losses of the LLC are shared proportionally among members according to their contributions. For example, if their contribution makes up 40 percent of the capital, the member has a 40 percent interest in the company and more voting power than another member with a lesser percentage. If members choose to have a different arrangement, it should be clearly outlined in the operating agreement.

Taxation

In 1997, regulations from the IRS went into effect allowing LLC members to decide/elect if the entity is to be taxed as a partnership or a corporation for tax purposes.

Withdrawal from LLC

Unless stated otherwise in the articles of organization or the operating agreement, a member is allowed to withdraw from the LLC with written notice. If terms are violated, the member may be liable to other members.

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