A multi-member LLC is a limited liability company with multiple owners but no managers. Instead, the owners manage the day-to-day operations of the LLC. The operating agreement of a multi-member LLC contains important information about the LLC in writing, such as the powers and duties of the members.Want to know more? Continue reading our article.
What Does a Multi-Member LLC Mean?
A Limited Liability Company stands for an independent legal entity established under state legislation to perform commercial activities. This format is very favored since it offers considerable advantages and works for a wide variety of ventures. By selecting an LLC, you enjoy a fluid management structure, straightforward taxation, and limited liability protection. Meanwhile, an LLC is less formalized than a corporation, so it is fairly easy to keep it running and build a good reputation.
If you intend to found an LLC together with a friend, family member, or some other partner, such a firm will be a multi-member LLC. There is no limitation on the number of MMLLC owners. It can work with either 2 members or several dozen. At the same time, the range of those who can become the owner of such a venture is quite extensive. It includes both individuals and LLCs or corporations. The only exception concerns companies, which have chosen the S-corporation tax regime. There is a restriction on the number (not more than 100) and type of the owners.
Operating Agreement: What Is That?
An Operating Agreement means a company’s internal document specifying its organizational structure and key operational procedures. With its help, the owners may regulate such critical points as rights and obligations, income distribution, responsibilities, etc.
This paper does not need to be filed with any government agency. Just make sure that all parties have signed it so that it becomes legally binding. After that, it is sufficient to keep an Operating Agreement in a safe place.
Why Is a Multi-Member LLC Operating Agreement Crucial?
Since most states do not require an Operating Agreement for launching a company, you might think it is a waste of time. However, it is not. For the MMLLC owners, it is especially important to take care of writing this paper in a timely manner and make it as thorough as possible. There are several reasons for this:
- Verbal agreements are unreliable, so the rights and duties of the participants, as well as the core principles of the organization, are better to be written down. These clauses will avoid possible disputes and misunderstandings between the members, making the entity more stable;
- Without an Operating Agreement enshrining the separation of the corporate assets from the private funds of its owners, your enterprise may resemble a partnership too much. If the court reaches such a conclusion, it may deprive the venture of limited liability;
- Every state has default rules applicable to establishments without relevant provisions in the Operating Agreement. Most often, these apply to voting procedures for the most critical decisions, as well as to the process of terminating an LLC. If possible, default rules should be avoided. They are broad and do not always best serve the interests of particular firms.
What To Include In a Multi-Member Operating Agreement?
The content and scope of this document are determined by the organization’s needs. Remember that it may not contradict legal requirements, include discriminatory provisions, or limit the competence of the courts. Most often, an Operating Agreement has the following main points:
Article I: Company Formation
This section provides all the fundamental information about the firm, its owners, and a registered agent.
Article II: Capital Contributions
To establish an LLC, you need to build its capital. By making initial contributions, which can be money or other assets, participants receive a proportional share of ownership.
Article III: Profits, Losses, and Distributions
When launching a startup, the owners expect it to be profitable, so it is advisable to stipulate everything about money in this agreement. For instance, you should agree on the calculation of the company’s profits and losses.
Furthermore, it is vital to establish the method of funds distribution among the participants. Depending on the preferences of the owners, the allocation can be direct or ad hoc. Under direct distribution, members receive money in proportion to their ownership interests as stated in the Operating Agreement. If you plan to use some other method, it should be disclosed in this section.
Article IV: Compensation
Sometimes, the owner pays for the goods or services for the LLC with their own money. In this case, they have the right to be compensated. The cost of the goods or services is usually determined unanimously by the members.
Article V: Management
The entity can be operated by managers, whose functions are covered by the Operating Agreement, or by the owners. To facilitate and streamline the work of an MMLLC, its members should select and appoint a Chief Executive Member (CEM). This person will be in charge of ensuring the stable daily functioning of the firm, as well as assigning roles to the rest of the participants.
Any disputes among the members are resolved by a majority vote.
Article VI: Bank Account
Decide on the bank at which you plan to open a commercial account and who will have access to it.
Article VII: Bookkeeping
The owners are required to keep financial records of the organization, including fund distributions and capital accounts. In addition, at the end of the year, you will probably need a report for each owner.
Article VIII: Transfers
Is it allowed to sell an ownership share and how to determine its value? What if the owner wants to withdraw from the entity without finding a purchaser for their interest? These are the basic questions for this section.
Article IX: Dissolution
If it was not specified that the entity would terminate after a certain period or upon a specific event at the creation stage, the participants should decide to cancel it. This requires a vote, following the procedure set forth in the Operating Agreement or default rules.
Certification of Members
At the end of the Operating Agreement, there should be a page with the signatures of all parties. Once signed, the document becomes enforceable.
How to Form a Multi-Member LLC?
Although an LLC is a formal structure, the process of its establishment is fairly easy. Of course, the regulations may differ slightly from state to state, but the basics are usually universal.
If you have a brilliant business idea and are ready to proceed, the first thing to do is to come up with the right name for your venture. Make sure that the preferred name meets all state standards, such as availability, reference to the type of business, and absence of forbidden words. Then you can fill out the Articles of Organization and send it to the state, paying the required fee, to have your business added to the database.
When an organization is officially formed, it is a good time to take care of its future by preparing an Operating Agreement. Since it is an internal company document, there is no official form. However, there are several other ways to get it.
If you can afford it, you can outsource the writing of an Operating Agreement to a lawyer. An experienced professional will take into account all of the most common risks and create a high-quality, customized document, which protects your interests in the best way possible.
Another good alternative for companies with limited budgets is the template provided by online providers. For example, ZenBusiness adds an Operating Agreement to each of its LLC packages, with prices starting at $49.
Finally, you can get this paper for free by selecting and filling out one of the templates available online. A drawback of this route, however, is that such templates are aimed at a wide range of ventures and may not be tailored to the individual needs of your firm.
Once an Operating Agreement is drawn up, it does not need to be registered or notarized. It comes into force the moment it is signed by all the participants of the organization. If you ever need to make changes to the text of the agreement, you just need to make the appropriate amendments by opening it on your computer. After that, the new version of the document should be printed out and submitted for signing to all LLC members.
Establishing your own company is an exciting event, and you probably want to get down to business as soon as possible. Be aware, however, that in most cases, the approval of the Articles of Organization and an Operating Agreement are not enough. You may also need one or more licenses to get started, depending on the scope and location of your enterprise.
Furthermore, to maintain limited liability protection, it is important to follow the rules of operating an LLC. These include opening a separate commercial bank account to avoid commingling corporate funds with the owners’ personal assets.
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