In every state, far more limited liability companies (LLCs) are being formed than corporations. LLCs provide flexible organizational structure as opposed to business corporations. One of the major reasons more people elect to form LLCs over corporations is the pass through tax treatment that can be received without dealing with the restrictions that an S-corporation presents. Answering questions regarding the rights or responsibilities of LLC members must be done by careful examination of a particular operating agreement and a state’s LLC Act.
The manner in which a LLC operating agreement is drafted is vital to the function of the LLC. Operating agreements can be drafted based on statutory defaults found in a state’s LLC act. Statutory defaults can vary from state to state as every state’s LLC Act is unique. This uniqueness is seen in the use of inconsistent terminology, differing default rights, and various limitations on the modification of default rules. Operating agreements can also be drafted by private ordering, giving contractual freedom to its members. When drafting an operating agreement it is vital that its author be competent and careful attention be given to drafting the operating agreement to match the deal structure and business plan of the LLC.
LLCs are funded through initial and ongoing capital contributions. Initial capital contributions can be made through cash, property, or services. Ongoing funding often requires periodic cash infusions. It is important that the LLC’s operating agreement detail the process and rules for contributing capital to the LLC.