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LLC membership agreement

LLC  Limited Liability Company (“LLC”) is a popular form of business organization that combines some of the advantages of a corporation with the personal taxation of a sole proprietorship. Often times we have clients coming to our office that have business disputes with their business partners, members of their LLC. When we start asking questions regarding the formation documents, including LLC membership agreement, clients reply that they do not have one and that they just trusted their partners and had an oral agreement or even understanding. It will save you thousands of dollars in litigation cost and, more importantly, stress and aggravation, if you come for a consultation regarding the formation of LLC and drafting of LLC membership agreement before you start your business or at least at the beginning of your entrepreneurial journey.

Why do I need an LLC membership agreement?

It is always better to make a clear and concrete agreement with your partners before starting any new business venture. In such an agreement you can set your respective capital contributions and outline members’ duties, rights and responsibilities. You can clearly outline your ownership interest and mechanism for sharing business profits and expenses.

Moreover, you need to decide who makes important business decisions, who is a managing member of your LLC and who has access to and signing authority for the business bank account. You may agree that some major decisions require unanimous consent of the members. Such major decisions may include the following:

  • sale, exchange, lease, assignment or otherwise transfer all or substantially all of the assets of the Company;
  • borrowing money on behalf of the Company in the excess of a certain dollar amount;
  • lending any Company funds or other assets to any person in an amount or with a value in the excess of certain dollar amount;
  • confessing a judgment against the Company; settling, compromising or release, discharging or payment of any claim, demand or debt in excess of certain dollar amount, including claims for insurance;
  • approval of a merger or consolidation of the Company with or into any other Company, corporation, partnership or other entity;
  • changing the nature or character of the business of the Company;
  • entering into any transactions outside of the ordinary course of business of the Company, including without limitations, assignment of Company’s rights in specific property;
  • requiring or making an additional capital contribution, except as otherwise outlined in the Agreement

Obviously, the above illustration serves only as an example, so you are well-advised to consult with an experienced attorney regarding the exact drafting of your LLC membership agreement that will be acceptable to all members.

What if I want to sell my share in LLC?

Sometimes, people want to move on to another business opportunity and sell their ownership interest in their current LLC. But how does it work? After all, this is not a share of a publicly-traded company that you can easily buy or sell online through your brokerage account. First, you will need to find a qualified buyer, and, second, you need other members’ agreement to accept a new member. What if other members do not want a stranger in your place? Or do not want to share control of the company and its managing responsibility, but maybe OK with accepting a silent investor? In order to avoid potential litigation with other members should there be a business dispute as to whether to accept a new member and whether to allow one of the members to sell its ownership interest in the company, you should put exact mechanism of such transaction in the LLC membership agreement upfront. This will provide certainty to every member and will simplify any dispute resolution if needed. The standard practice is to provide a right of first refusal for the company. That means, if a member of LLC has an offer to purchase his ownership interest in the company, he should give notice of this offer to the remaining LLC members. They will have an option to exercise their right of first refusal and buy your ownership interest in proportion to their own interest from you on the same conditions that you are being offered. There is usually a time limit to exercise this option (e.g. 30 days from serving the relevant notice). This provision gives certain protection to both leaving and remaining members of LLC. Related provision may authorize that any new member is admitted on the unanimous consent of all members.

How do I dissolve LLC?

Another aspect of LLC regulation that is always part of any LLC membership agreement is the provision for its dissolution. Usually, the dissolution of LLC is done on the unanimous consent of the members or the occurrence of a Withdrawal Event with respect to a Member and the failure of the remaining Members to elect to continue the business of the Company. Withdrawal event maybe death, retirement, withdrawal, expulsion, or dissolution of a Member, or an event of bankruptcy or insolvency, with respect to a member, or the occurrence of any other event which terminates the continued membership of a member in the Company pursuant to the laws of New York.  Please note, that not just an individual can be a member of LLC, but another LLC may be and often is a member or even a managing member for structuring purposes. For example, in multifamily rental investment structure, one LLC may consist of several individual LLC investors, and be a member of another LLC that also has another managing member who is in charge of day-to-day managing of the investment. That LLC, in turn, can be a single member of another LLC that actually owns the property. This may be done for the streamlining of lending, accounting and taxation.

If you need advice, drafting or negotiating an LLC membership agreement, please contact our firm.