An operating agreement is the organic document of a Limited Liability Company. It defines the relationship of the members among each other, the relationship of members with the company, and how the company will be managed / operated. One important component of an operating agreement, in the context of a multiple member limited liability company, is the inclusion of provisions which restrict the transferability of membership interests. In the context of a corporation, this would normally be handled in a buy-sell agreement – but for a limited liability company, it is typically addressed in the operating agreement (although it certainly could be addressed in a separate buy-sell agreement among the members.)
The importance of these provisions is to maintain the closely held structure of the LLC. If members are allowed to freely transfer their interests, or if those membership interests are freely allowed to transfer via involuntary means (i.e. death, divorce, bankruptcy), members who originally started the business with one or more particular members may be forced to continue the business with new members that they do not necessarily approve of. Putting restrictions on transferability can solve this issue by giving members control over how/when/why membership interests can be transferred.
If you are interested in learning more about what types of things should typically be considered in these provisions, check out my post on buy-sell agreements.
Limited liability companies (LLCs) can be managed by either their members, or by a board of managers (board of managers is the term used in Indiana – some states differ slightly). This is something that needs to be specified in the articles of organization for the LLC, and although the articles can obviously be amended at any time to change how the LLC is managed, it is an important decision nevertheless.
A member managed LLC is exactly what it sounds like – an LLC with its daily business managed by its members. This is obviously not a big deal if you have one, or even two members. Problems arise when an LLC has multiple members. Typically, except as otherwise spelled out in a written operating agreement, all of the members will have the authority to act on behalf of the LLC (sign checks, execute agreements…etc). This is not an ideal situation.
A manager-managed LLC, on the other hand, has its daily business matters managed by a board of managers. This would be analogous to a board of directors or even officers in a corporation. Members elect the board of managers, and become much more passive in the operation of the LLC. Members, of course, can also serve as managers. The flip side of this, and another advantage to having a manager managed LLC is that you can elect managers that are not members.
Any LLC, regardless of whether it is member managed or manager managed should clearly define the authority of its members and managers in a written operating agreement executed by all the members and the LLC. Check back sometime soon for a follow up post about how this should be handled and what things need to be considered.
Beginning in the late 1980s, various states began exploring a hybrid entity, one in which co-owners would enjoy the liability protection of limited partner status and the management participation feature of the general partners. Wyoming was the first state to enact its limited liability company statute and many states quickly followed suit. Indiana adopted its limited liability company statute, known as the Indiana Business Flexibility Act, in 1993.
Most of the characteristics of a partnership are shared by the limited liability company. The company is formed upon filing articles of organization with the Secretary of State’s office; rights and responsibilities are spelled out in a written operating agreement; the interests are freely transferable (though again, the transferee does not automatically become a member in the company); and the entity itself usually does not pay any tax, although some states other than Indiana do subject limited liability companies to franchise taxes.
A major difference between a partnership and a limited liability company is that each of its members enjoys liability protection. Another major difference is that in recent years, most states have recognized limited liability companies with only one owner. This means that you can protect yourself from personal liability and yet still operate your business, in many ways, as you would a sole proprietorship (presuming you comply with the formalities of the limited liability company). These so-called “single member LLCs” offer an important tax advantage—annual information can be reported on the owner’s individual tax return, and no separate tax return or identification number is required.
A limited liability company can either be managed by its members, or the members may select one or more managers (e.g., a board of managers similar to a corporate board of directors) to run the business. Most states will require you to decide upfront how the company will be managed. All things being equal, most business owners will choose the limited liability company form over the partnership form. However, things are almost never equal and nuances do exist. It is important to discuss these details with your attorney.
The Law Office of Brian V Powers works with new and prospective business owners to aid in the purchase, structuring and formation of a new business. We also provide convenient, fixed pricing for certain business formation legal services. Contact us today at inquiries@bvplegal.com for help forming your Indiana Limited Liability Company.
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=946267fb-18b7-43bf-b68e-d661a70e17be)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=9452a412-68c7-4d3b-9e24-23dd5a0d05fa)
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=a9ed8492-dad9-426f-958c-d37f69fbc3fd)
