This checklist compiles questions to consider before preparing a comprehensive limited liability company agreement. The answers to these questions determine the form of LLC agreement (or operating agreement) to use, identify precedents that may be helpful, and identify areas requiring more discussion.
Initial Considerations
- Is this a single-member or multi-member limited liability company (LLC)?
- Will the LLC use a long or short-form LLC agreement? LLC members may enter into one comprehensive long-form LLC agreement or a series of one or more stand-alone agreements covering different matters.
- Are there majority and minority interests, or are the interests divided evenly among the members? Minority and majority parties often have different concerns than members in an LLC with evenly divided interests.
- Is this a joint venture company? LLC agreements for joint venture companies often include provisions not usually found in LLC agreements for other companies (such as provisions regarding the ownership and use of intellectual property created by the LLC).
- Who are the LLC’s investors? For example, private equity firms typically want more control over management than passive investors.
- Are any of the members key employees? If so, there are often special considerations for those members, such as employment agreements and non-compete provisions.
- Are tax advisors reviewing the LLC agreement? Tax advisors (such as tax counsel) should review the LLC agreement, especially the tax matters section, the capital accounts section, and the allocations and distributions provisions.
Parties and Background
- Are all of the parties identified in the LLC agreement?
- Should the LLC be a party to the agreement? The LLC is usually a party if it has obligations to the members under the agreement.
- Is the LLC agreement effective when signed or on a different date? If the LLC is not yet formed, the agreement is usually effective on company formation.
- Is there any important or relevant background information to include in the recitals? For example, the parties may want to state the reasons for forming the LLC.
Organizational Matters
- What is the LLC’s name? Does it meet the statutory requirements of its state of formation?
- Has each member provided the member’s contact information (mailing address, telephone and fax numbers, email address, and principal contact)?
- When was the LLC formed? If the LLC has not yet been formed, when will it be?
- What is the name and address of the LLC’s registered agent for service of process?
- Where is the LLC’s principal place of business?
- Will the LLC conduct business in other states besides its state of formation? If so, does the LLC need to file for foreign qualification in those other states?
- Does either the state in which the LLC will be organized or any state in which the LLC will qualify to do business have any publication requirements? If so, ensure the LLC satisfies them.
- What is the LLC’s term? The term can be perpetual (subject to early termination as may be specified in the agreement) or for a fixed period (see Dissolution and Winding Up, below).
- What is the LLC’s business purpose? Will it be narrow in scope (for example, buying a piece of real estate) or broad (for example, to permit the LLC to conduct any business allowed by law)?
- Will the LLC be a professional service LLC providing a professional service that requires the individuals providing the service or the members (or both) to be licensed by the state of formation? If so, do those individuals and the members have the proper licenses?
- Does the LLC require a license to operate its business? Depending on its type of business and where it is located, the LLC may need to obtain local and state business licenses.
Member Considerations
- How can new members be admitted? For example, does the admission of new members require the consent of the managers or a vote of the members?
- If the LLC is manager-managed, will the LLC agreement provide that the managers can unilaterally update the agreement to reflect new members?
- What are the limitation of liability and indemnification provisions? LLC agreements usually provide that:
- members are not liable for more than their capital contribution; and
- subject to certain exceptions, the LLC will indemnify members from and against claims and demands resulting from being a member of the LLC.
- Can members enter into transactions with the LLC? For example, can the members make loans to the LLC?
LLC Interests
- Will there be more than one class of LLC interests? If so, consider the following for each class:
- voting rights (see Voting and Action, below);
- allocation, distribution, and liquidation preferences (provisions of the LLC agreement referred to as waterfall provisions specify the priority of distribution of cash and other assets to the members) (see Allocations and Distributions, below);
- management rights (see Management, below); and
- additional capital contributions (see Capital Contributions, below).
- Will the LLC interests need to be registered under any blue sky laws? Will the LLC need to file appropriate documents for an exemption from registration under the Securities Act of 1933 (Securities Act), such as Form D?
- Will the LLC issue profits interests to members or employees?
- Will any of the members be granted preemptive rights to avoid dilution?
- Will the LLC interests be evidenced by certificates?
Voting and Action
- Will the members have voting rights? If so, consider the following:
- what matters can they vote on? Members are often given the right to vote on certain significant matters (such as a sale of all or substantially all of the LLC’s assets).
- what vote is required to approve each matter (majority, supermajority, or unanimous)?
- are there any actions that require a higher threshold vote than others? For example, the LLC agreement may specify that certain matters require only majority consent while other matters (such as dissolving the LLC or selling all of its assets) require supermajority or unanimous consent.
- Will the LLC agreement provide for meetings and actions by the members? If so, consider including provisions relating to:
- annual and special meetings;
- notice of meetings;
- setting a record date;
- quorum requirements;
- acting by written consent; and
- acting by proxy.
Transfers of LLC Interests
- What transfer restrictions will the LLC agreement impose? LLC agreements often contain detailed transfer restrictions. If the LLC is treated as a partnership for US federal income tax purposes, any transfer (or withdrawal) that would cause the LLC to be treated as a corporation for US federal income tax purposes should be prohibited by the LLC agreement notwithstanding any other provisions of the LLC agreement.
- Will the LLC agreement impose restrictions on the members from encumbering their LLC interests (such as using them as collateral for a loan)?
- Whose consent will be required to approve a transfer (for example, the managers or the members)?
- Will the LLC agreement designate permitted transferees? LLC agreements typically allow transfers of LLC interests to a defined group of transferees without prior consent, such as:
- family trusts;
- affiliates;
- immediate family members; and
- other members.
- What types of transfer and buy-sell provisions will the LLC agreement include? Common examples include:
- tag-along and drag-along rights;
- rights of first offer;
- rights of first refusal;
- put rights; and
- call rights.
- Will the LLC include buy-sell provisions in the LLC agreement or in a separate buy-sell agreement? What events trigger the buy-sell provisions?
- What are the terms and procedures if a buy-sell provision is triggered? How are valuation and payment methods addressed?
- What are the procedures for admitting additional members? New members (including transferees of existing LLC interests) usually have to meet certain requirements before becoming a member for purposes of the LLC agreement (such as agreeing to be bound by the agreement and certifying that the new member is an “accredited investor” under the Securities Act).
- If a transferee is not admitted as a member under the agreement, what will that transferee be entitled to? A transferee not admitted as a member is typically only permitted to receive the economic benefit of the LLC interests.
Withdrawal
- Will a member be allowed to withdraw from the LLC? If a member can withdraw, what notice or process must the member follow to withdraw? What liability, if any, will there be for wrongful withdrawal?
- Can a member be expelled? If the LLC agreement allows for the expulsion of a member, what process must be followed to expel the member? When will an expulsion become effective?
- Are the provisions in the LLC agreement that address withdrawal and expulsion of a member consistent with any buy-sell provisions and transfer restrictions in the LLC agreement or stand-alone buy-sell agreement? For more information on buy-sell provisions and transfer restrictions, see Transfers of LLC Interests, above.
Management
- What is the management structure? Will the LLC be managed by its members, one or more managers, or by a separate board of managers?
- Will the LLC have officers? If so, the LLC agreement should include relevant provisions, such as procedures for appointment and removal, powers, responsibilities, and authority.
Member-Managed LLC
- If the LLC is member-managed and has more than one member, consider whether it will be managed by:
- all of the members;
- specified members; or
- a class of members.
- If the LLC is member-managed, what are the members’ powers?
- What standards of conduct will the members be required to adhere to? If permitted by applicable law, will the members’ fiduciary duties be waived?
- Will any member be compensated for services provided to the LLC?
Manager-Managed LLC
- Who is the initial manager? The LLC agreement usually identifies the initial manager.
- Will there be more than one manager? If so:
- how will they settle any disputes between or among them?
- should they be organized into a board of managers structure?
- Must the managers also be members? This may be a matter of law, so review the LLC laws of the relevant jurisdiction before appointing any manager.
- How can a manager be removed? Managers can often be removed with or without cause by the vote of a certain percentage of LLC interests.
- How can manager vacancies be filled (for example, if a manager resigns or is removed)?
- Should each manager have equal voting power, or should some managers have more votes than others?
- What are the managers’ powers? Do certain managers have blocking rights over certain LLC actions? Will only certain managers have the power to bind the LLC?
- Are there any limitations on the managers’ powers? What management authority or responsibility, if any, will be retained by the members? Common matters requiring member approval include:
- a sale of all or substantially all of the LLC’s assets;
- a merger of the LLC;
- incurring debts over a certain amount of money; and
- a dissolution of the LLC.
- If a manager-managed LLC will have more than one manager, consider including provisions relating to:
- regular and special meetings;
- notice requirements;
- quorum requirements; and
- acting by written consent.
- Will the managers be compensated for acting as the managers? The LLC agreement should specify any compensation to which managers will be entitled.
- What standards of conduct will the managers be required to adhere to? If permitted by applicable law, will the managers’ fiduciary duties be waived?
- Will the LLC agreement include specific indemnification procedures for the managers? Managers are typically indemnified to the maximum extent allowed by law.