This Sample Operating Agreement incorporates many of the asset protection concepts presented throughout the Business Owner's Toolkit. It provides for the issuance of voting capital and allows for the issuance of nonvoting capital. Using nonvoting capital can be a major component in a popular estate planning, and thus asset protection, strategy: the family limited liability company (LLC). The Sample Agreement provides that members who hold only nonvoting capital have no right to vote as members or to participate as managers. This eliminates control issues involving junior family members, and also should increase the estate tax savings that result from discounting of the other family member's interests.
The Sample Agreement provides that the voting members also manage the LLC. This eliminates questions of authority between members and managers, and the potential that transactions may be authorized by the wrong group, and thus unauthorized. The Sample Agreement does not provide for regular meetings, but instead allows the voting members to act informally in managing the business.
Flexibility is built into the document elsewhere. For example, the Sample Agreement allows for the voting members to appoint officers to manage the business, but allows the voting members to control these issues outside of the agreement. This arrangement also means that the LLC can be managed in a more dynamic way, without the need to continually amend the operating agreement. All of these strategies also should significantly reduce the potential for a piercing of the veil of limited liability.
The Sample Agreement also provides for mediation and arbitration of disputes, and for reimbursement of attorney's fees and related costs to the prevailing party, as ways of controlling the court system. The Sample Agreement also incorporates buy/sell provisions, which control a member's resignation, retirement or transfer of an interest. A member may voluntarily withdraw, but only after one year. This provision achieves security for the business. During the second year, only book value is paid to the withdrawing member. This strategy eliminates the costs and potential disputes associated with determining fair market value of an interest.
Finally, of course, this Sample Agreement is based on one of the most effective, and basic, asset protection strategies, one in which the owners can achieve protection of their personal assets from the claims of the business's creditors, and protection of their business entity's assets from the claims of their personal creditors (i.e., the formation of an LLC through which the business will be operated).
Extreme caution should be exercised before this Sample Agreement is adopted for actual use. This Sample Agreement is based on the formation of the LLC in Delaware. Certain features, such as the elimination of voting rights for nonvoting members, may not be permissible in all states. Moreover, the Sample Agreement generally requires the unanimous approval of the voting members. This is especially appropriate in small businesses (e.g., a two or three voting member LLC) to prevent the vote of one voting member from being effectively eliminated. However, a majority (greater than 50%) or supermajority (at least 67%) vote may be more appropriate in a larger LLC. Paragraph 6.4 of the Sample Agreement, which governs involuntary transfers, may only be appropriate in a family LLC.
Many other options also exist. For example, the Sample Agreement provides that voting rights are proportional to the ownership interests in voting capital. It might be desirable, in certain cases, to provide that voting rights are per capita (one vote per voting member), as exists in a general partnership. In addition, relative ownership interests are defined in the Sample Agreement by way of a formula and are identified in an attached schedule. This practice is standard in all partnership and most LLC agreements. Alternatively, the Sample Agreement could be modified so that interests are represented by "shares," as is the case in a corporation. This alternative is simpler, but could introduce the possibility of fractional shares. It may be more appropriate where only cash is contributed by each member.
Similarly, while the Sample Agreement allows for the voluntary withdrawal of a member after one year (subject to the buy/sell provisions), the Sample Agreement could be drafted to provide that a voluntary withdrawal of the member is a violation in any year.
It also is possible to adapt this Sample Operating Agreement so that it can serve as a shareholder operating agreement for a statutory close corporation. However, all of the aforementioned decisions require professional guidance.
This Sample Operating Agreement should not be used before an attorney reviews it and adapts it to the particular circumstances of the business and the owner and the legal jurisdiction.
The file contains a 16-page document in rich text format (RTF) that is suitable for use with most word processing programs used in the Windows environment.
Sample Operating Agreement for a Delaware LLC
The sample operating agreement includes sections on the following:
- organization, membership interests, capital accounts and management
- identification of the officers and agents of the company, and how meetings and votes are conducted
- allocations and distributions of profits and losses
- transfers or assignments of interests
- accounting and recordkeeping
- dissolution and closing down operations
- exculpation and indemnification
- mediation and arbitration of disputes
Establishing the Business Entity