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Multi-Member LLC Operating Agreement

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What is a Multi-Member LLC Operating Agreement?

A multi-member LLC operating agreement is a legal contract that outlines the agreed-upon ownership structure and sets forth the governing terms for a multi-member LLC. In addition, it sets clear expectations about each member’s powers, roles, and responsibilities. It also allows for the setting out clear financial and working relations between the members and the business managers.

The contents and form of an LLC operating agreement will vary widely from one company. Still, most will have these key sections: basic entity details, organization, and voting, management, capital contribution, membership changes, distribution, dissolution. In addition, this contract clearly determines ownership stakes outlines the voting rights and how decisions are made, amongst other structural features of the LLC.

What is a Multi-Member LLC?

A multi-member LLC also referred to as a MMLLC, is a limited liability company with two or more members. The LLC operates as a legal entity separate from its members, so members have protection from the LLC's risks and debts liability.

Members of MMLLCs can be individuals, corporations, or even other LLCs. An operating agreement is a primary document that governs a limited liability company (LLC). However, an operating agreement is not required by all states for LLCs. Some states, such as California, do not require LLCs to have an operating agreement, although it is still recommended to have one. There needs to be an LLC operating agreement to establish clear processes and communication required to keep everyone in the LLC on the same page and prevent misunderstandings in doing business.

LLCs are pretty popular for these three reasons:

  • Protection of personal assets of the members.
  • Flexibility in setting up and taxation.
  • Easy to form with step-by-step guides and outlines readily available.

Though multi-member LLCs offer flexible setup and elections for taxation, the default tax classification for multi-member LLCs is partnership taxation. LLCs can also elect to be taxed as an S corporation or C corporation by filing the appropriate forms with the IRS.

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What’s Included in a Multi-Member LLC Operating Agreement?

Operating agreements are tailored as per a company's specific needs. However, these articles are a must-have for every LLC:

Article 1: Company Formation/Articles of Organization

This section deals with the formation of the company. It will have information on when the LLC is created, a list of members, and an ownership structure. In addition, it will outline if the members have equal or different amounts of ownership. It performs four major functions:

  • Affirms the LCC is formed as per the state laws and intends to perform lawful business.
  • It notes critical business information like the members' information, registered agent, and business address.
  • It lists the events under which the LLC business can end and how members can continue the LLC.
  • It explains how the LLC can add new members.

Article II: Capital Contributions

The section covers each member's initial capital contribution in starting the LLC, be it in the form of cash or other assets. Here, you enter the total value of the contributions and note whether members are obligated to contribute more capital later on.

Article III: Management and Voting

The section addresses the issue of managing the company and how each member will vote. The company can be member-managed or manager-managed, with a clear system on appointing managers and how individual members will be assigned other specific duties. In a manager-managed LLC, the members appoint a manager or managers to handle the day-to-day operations of the business, and the members retain the power to make major decisions.

However, all LLC members still retain the authority to make LLC decisions, with any legally binding agreement signed by all members. The agreement also outlines the consequences of any member failing to perform their duties. Finally, the article notes that members aren’t liable for LLC’s losses, damages, or expenses, and other actions against the LLC as long as they are acting in good faith.

The members may choose to make the LLC decisions through a voting process. The operating agreement will specify how votes are allocated, with the majority vote deciding disputes. The agreement will also specify the number of votes required for particular actions.

Article IV: Distributions

The section sets up the annual determination of gains and losses, outlining if the distributions are annual or more often. It also provides how profits and losses made by the LLC are shared per each member's ownership percentage, which might be in the form of a physical asset, money, or other business assets. Finally, the section defines how the company is liquidated and distributions per Treasury Regulations.

Article V: Membership Changes and Transfers

The section covers removing or adding new members to the LLC. It states if and when members of the LLC can transfer their ownership in the company. It will specify what happens in the event of death, bankruptcy, or divorce.

The section covers three key issues:

  • How members can buy out the interests of a member who wants out.
  • How to determine the value of the member's interest who wants out.
  • What happens should a member wants to exit, but there is no buyer for their membership interest.

Article VI: Dissolution

The section of the operating agreement explains the circumstances under which the LLC may be dissolved and covers the process of terminating the LLC should all the members vote to end it. The article also notes that the LLC pays all its debts before making distributions to members upon dissolution.

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How Do I Create a Multi-Member LLC?

An LLC is a serious business venture, but forming one isn’t a highly complex endeavor. Below are five steps to follow when creating a multi-member LLC.

  1. Decide on a business name for branding purposes. The name must meet the state law requirements and must not be used by another business.
  2. Choose a registered agent who will handle all legal and official documents on behalf of the LLC before passing them to the persons in charge of the LLC. This can be an individual or a company.
  3. Abide by the state law by filing Articles of Organization with the state agency responsible for business filing and include your LLC operating agreement therein.
  4. Get an Employer Identification Number, also called a Tax Identification Number (TIN), if the LLC intends to hire employees. The TIN or EIN is used to file income tax returns with the IRS and open a business bank account.
  5. Keep the LLC active and also in good standing with the state. Pay all the annual fees required of the LLC to appropriate government agencies and maintain a business bank account in the LLC's name. You can obtain a Federal Tax ID once the LLC name is official.

Member Managed LLC Vs. Manager Managed LLC

There are two options for the management structure of an LLC. In writing up your LLC operating agreement, you must indicate which structure you will be using. These are:

  • Member-managed LLC. The state considers all LLCs as member-managed unless its documents specify otherwise. All owners of the company participate in the day-to-day running of the business, with the power to sign contracts, manage operations, and make critical business decisions.
  • Manager-managed LLC. The LLC has a considerable membership number, so a manager-managed LLC is the best option. A manager is appointed to take care of the business's daily operations, but the owners retain the power to make all critical business decisions.

Who Needs A Multi-Member LLC Operating Agreement?

Most states will require that LLCs, both multi-member and single-member LLC, have an operating agreement in place. However, even if your state doesn’t have an operating agreement as a legal requirement, it is highly recommended that every multi-member LLC has one created as soon as the LLC is formed.

LLCs are increasingly becoming one of the top structures that even sole business owners opt for. A sole business owner can create a single-member LLC operating agreement (Single Member LLC) as a way of safeguarding their limited liability status and ensuring that the courts uphold it.

Can I Write My Own Operating Agreement for My LLC?

Yes, you can write up an operating agreement for your LLC as long as you are thorough, cover all the details, and craft a document that can stand up in court. However, LLC operating agreements have vital information crucial in settling legal disputes should they arise, which is why consulting a business lawyer when crafting one is always a wise decision.

All that is needed is to sit down with all the co-owners and a lawyer, answer a few simple questions, and then figure out what else needs to be covered in the agreement. When all the co-owners agree with the contents and append their signatures, the document becomes a legal LLC operating agreement. If you are a single-owner LLC, you don't need a lawyer to write your operating agreement and start your business.

FAQs

Q: How is a multi-member Limited Liability Company taxed?

A: By default, multi-member LLCs are classified and taxed as partnerships; they don't have a tax class of their own. Income from the entity is apportioned to the members, who are then expected to pay their fair share of taxes as per their ownership in the company. Should the LLC opt to pay its taxes either as an S corporation or C corporation, it must first file Form 2553 with the Internal Revenue Service (IRS).

Q: How many members form a multi-member LLC entity?

A: If the LLC keeps its original tax designation as a partnership, there is no limit to its number of employees. However, if the LLC changes its designation and is taxed as an S-corporation, its maximum number of members is 100.

Q: What rules should be upheld when naming an LLC?

A: Generally, two rules need to be upheld when naming an LLC. These are:

  • The name of the LLC can't be in use or too similar to that of another entity in the same state.
  • Any name that you choose must end with "L.L.C," "LLC," "Ltd. Liability Co.", "Limited Liability Company," and so on.

Q: What is an LLC subscription agreement?

A: An LLC subscription agreement is a formal agreement between a limited liability company and an investor where the investor is looking to invest/subscribe to the LLC in the form of buying the company's shares at an agreed-upon price.

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