Make sure you have your “Roadmap!”(part 1.)
When starting a limited liability company (LLC) with multiple owners or investors, it is important to have a roadmap of how profits and decision-making power will be distributed. This is where an LLC operating agreement comes into play. Operating agreements are essentially contracts among the members of a LLC, which outline the details of the company’s operations. Here are a few things that should be addressed in an operating agreement:
Initial Capital Contribution- At the outset of the formation and founding of the company, all of the members need to define their initial capital contribution. In Kentucky, the contribution can be in the form of capital, equipment, or even services. If the contribution is in the form of services, an additional agreement is needed to help detail what that will look like.
Distribution of Losses & Profits- An operating agreement should state how profits and losses will be distributed among the members. One benefit to operating agreements is the flexibility they provide for the distribution of profits and losses among members.
Buyout/Sale of the business- An operating agreement should detail different issues related to the potential buyout of a member’s shares or the sale of the business. This includes how member shares will be valued, any limitations on the sale of shares, and the amount of voting power required to approve a sale.
Voting of members- While voting power is usually distributed according to the economic equity a member owns in the LLC, this is not required. Once again, operating agreements can be flexible to fit the needs of the company and its owners. Being clear on each member’s voting power and what amount of voting power is needed to pursue an action is super important for an operating agreement.
Dissolution of LLC-The operating agreement should include triggering events that would cause the business to be dissolved and what is required to dissolve the LLC.
Be sure to check out part 2 of this post for a few more tips on what should be included in an operating agreement! If you’re forming a new multimember LLC, contact me and I can draft an operating agreement for your new company!