Multi-Member LLC Operating Agreement
A multi-member LLC (also called a “member-managed LLC”) is a limited liability company that has more than one owner but no managers. Instead, owners run the day-to-day operations of the LLC. A multi-member LLC operating agreement puts essential information about this LLC in writing, such as the powers and duties of members. An LLC operating agreement is crucial for a multi-member LLC, as these are the LLCs most likely to suffer from internal disputes.
Why should I have a multi-member LLC operating agreement?
A multi-member LLC is a limited liability company that has multiple owners who all work to run the LLC together. These are the LLCs most likely to end up in dispute due to members not establishing clear processes and communication in the beginning stages of the company. It’s always exciting to start a business. Many people want to avoid the awkward discussion about what to do when you don’t like each other anymore or the business fails. Our multi-member LLC operating agreement goes into great detail as to what you agree you’ll do should the other party decide to no longer be a part of the LLC or do their share of the required work.
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What should a multi-member operating agreement include?
From contributions to dissolution, there’s a lot to cover in an operating agreement. Our free multi-member LLC operating agreement template is comprehensive, covering the following crucial topics:
Article I: Company Formation
This first section of the operating agreement performs 4 major functions:
Affirms that the LLC has been formed by state laws and will conduct lawful business
Notes where key business information (such as member info and registered agent) can be found
Lists the events that can end the business (and how members can continue the LLC)
Explains how to add new members
Article II: Capital Contributions
Each member makes initial capital contributions by funding the LLC with cash or other assets in exchange for ownership interest. In this section, you’ll enter the total value of all contributions. This article also notes that members are not obligated to contribute more later on.
Article III: Profits, Losses and Distributions
So, when will members see some money? This section sets up annual determination of profits and losses. Allocations are then made in proportion to each member’s percentage of ownership interest. Distributions can be annually or more often, assuming the LLC’s expenses and liabilities are paid up. If the company or membership interest is liquidated, distributions follow Treasury Regulations.
Article IV: Management
In a member-managed LLC, members are in charge. But with multiple members, how does business actually get done? 10 people can’t be king at the same time. What if there’s a dispute? Does everything have to be voted on?
This section sets up a system appointing a Chief Executive Member (CEM) for daily decision making and assigning other specific duties to individual members. However, all members have the authority to make decisions when performing duties for the LLC. Any disputes among members (including with the CEM) are decided by majority vote. Any legally binding agreements must be signed by all members. There are also consequences outlined for failing to perform duties.
This article also notes that as long as members are acting in good faith, they’re not liable for losses or damages to the LLC or expenses resulting from lawsuits or other actions against the LLC.
Article V: Compensation
There are situations where the LLC may owe members for services or expenses. This section states that members are entitled to compensation for services—and the value of any service rendered must be unanimously agreed upon. Members will be reimbursed for approved LLC expenses paid out-of-pocket.
Article VI: Bookkeeping
Article VI explains how books are kept. Members are responsible for keeping financial records, including separate capital and distribution accounts for each member. This section states that the LLC is to keep books on a calendar year. At the end of the year, the books are closed and a statement for each member is prepared.
Article VII: Transfers
This section goes into detail on 3 important points:
How the other members can buy out a member’s interest if a member wants out
How the LLC determines the value of the interest of the member who is leaving
What the LLC will do if a member wants to exit without a buyer for membership interest
This section is designed to balance a few different potential issues. For instance, it’s important to protect the LLC from losing control to outside members. As such, this section outlines processes for the LLC to give members first shot at buying an exiting member’s interest and allows the LLC to assign interest to current members if there’s no buyer. Also, if a transfer isn’t unanimously approved by the LLC, whomever gets the interest won’t receive participation or management rights.
Another key issue is fair valuation—since it’s of interest to sellers to get high valuations and buyers to get low valuations, this section ensures that both sides have input and can defer to a third-party appraiser in case of dispute.
Article VIII: Bank Account
While everyone may have decision-making power, not everyone needs full access to the company coffers. This section designates a bank and give specific members financial authority for deposits, withdrawals, endorsements, payments and more.
Article IX: Dissolution
Members can vote to end the LLC through the process of dissolution. This article notes that upon dissolution, the LLC is responsible for paying debts before making any distributions to members.
Certification of Members
This is the signature page. Members sign to acknowledge that they agree to abide by the terms of the agreement.