Signing an Operating Agreement

An earlier post discusses the formation of a limited liability company (“LLC”). As that post explains, the process includes creating an Operating Agreement for the company.

The agreement will cover many issues, but in particular you want to consider the following.

The Operating Agreement should name the persons who will be members of the LLC. In addition, the agreement should state the percentage of ownership (called “membership interest”) of each member.

Most Operating Agreements state that the members will share in the profits and losses of the company based upon their percentage of ownership. The law allows the members to agree to some different split if they want.

In Mississippi, the law allows a limited liability company to be formed for the purpose of “engaging in any lawful business.” Of course, most companies are formed with the intent that it will engage in a specific type of business.

You should read the Operating Agreement to determine whether the other members can vote to expand the business beyond what was originally planned.

It is common for the agreement to state that a member’s vote is equal to his or her membership interest. Again, the law allows the members to create different voting rights if they choose. It is even permissible to have non-voting members.

Before signing an Operating Agreement, you should understand your voting rights. You want to know your ability to determine the company’s direction.

A well-drafted Operating Agreement will explain the amount of votes necessary to take action on behalf of the company.

The agreement will provide that a vote of a majority of the membership interests is necessary to take a particular action. For example, if there are five members who each have a 20% membership interest, then three of them would have to vote to take action. Their votes equal 60% of the membership interests.

As stated above, however, the law allows for the Operating Agreement to set forth different requirements. For example, the agreement might call for:

You should understand how voting occurs before signing the Operating Agreement.

At the time a limited liability company is formed, the members will usually make a financial contribution to the company to get it started. The contribution is often money, but it can also be property.

Before you sign the Operating Agreement, determine whether you can be required to make additional contributions in the future.

A well-drawn agreement will explain whether you can withdraw from the LLC at a future date. It will also address the financial consequences to you of doing so.

An Operating Agreement will cover many other issues. Before signing one, contact the Panter Law Firm for a consultation. 601-607-3156

www.craigpanterlaw.com

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