Sunday, November 4, 2012

Checklist for Drafting an LLC Operating Agreement, Partnership Agreement, Bylaws

              
Issues to consider when drafting Shareholders Agreement, Bylaws, LLC Operating Agreement, or Partnership Agreement:


I. MEMBERS
                       
Membership Classes and Responsibilities. 
Will there be different classes of members? (voting vs. nonvoting, active vs. passive).
Minimum amount of time contributed by each member?
Will some members have the authority to act freely within their assigned fields or responsibility, without the need to seek approval of other members?
What happens if one of the members is not pulling their weight?
Are members allowed to participate in outside business activities that might be in competition with the company business? 
How can the new members be admitted?

Management. Member managed or manager managed? What would it take to remove a manager?

Indemnification. Disclaim member liability to the fullest extent allowable by state law or not?  Procedures for indemnification, attorney fees authorized?


II. CAPITAL CONTRIBUTIONS; PROFITS AND LOSSES
           
Capital Contributions. Required initial contribution of each member?  Will the members be required to contribute additional capital to the company after their initial capital contribution? How will sweat equity, IP and in-kind contribution be valued? (It is taxable income to receive a capital interest in exchange for services in an LLC that is taxable as a partnership. So, the higher you valuate the sweat equity the more tax liability you’ll incur. One way to deal with this would be to contribute a nominal amount of cash initially and loan money to the LLC, with interest, by executing promissory note(s) with any or all members. This way everybody would retain their respective percentage ownership and the LLC will be adequately funded without the extra tax burden.) 

Profits and Losses. Will profits and losses be allocated on the basis of ownership percentages? The amounts of any regular drawings against profits. Will any of the members receive a priority return over other members (e.g. when one member contributes money and the other just "ideas" that might not even play out)?


III. MEETINGS

Meetings. When will the meetings be required?  Email/phone/Skype meetings ok? Who can call a meeting? Is there a quorum requirement? What matters require voting by (i) majority, (ii) supermajority (new members/capital, amendments), and (iii) unanimous (dissolution) consent? Resolution of 50/50 deadlocks - shotgun clause, etc.



IV. TRANSFER OF INTEREST

Sale of Interest.
Company’s right of first refusal before a member can sell the interest to third parties?
Can the company purchase a member’s interest upon their death?
Will it be funded with life insurance?
How will the event of protracted disability of a member be handled? Period of time in which a former member may not engage in a competing
business.
Penalty for early withdrawal from business (e.g. lower share valuation if leaves the company within the first year or two)?

Buyout. In what circumstances members force a member to sell interest and at what price? More on buyout agreements and methods of valuation here.
                                                                             

V. DISSOLUTION

Will any specific events be deemed liquidating events? 
Priorities for distribution.


VI. MISCELLANEOUS

Tax classification
Entire Agreement
Procedure for amendments
Governing law
Dispute resolution
Successors and assigns