THE LIMITED LIABILITY COMPANY (“LLC”) has become a popular choice for small businesses because LLCs combine key features of both partnerships and corporations. All states have enacted LLC statutes (i.e., laws). In absence of an agreement among the owners (i.e. members), these laws establish a set of “default rules” that will govern the business relationship of the members and the internal affairs of the LLC. An agreement among the members as to these relationships and affairs is referred to as an “Operating Agreement.” In most cases, they are not required by law, but are important because the default rules may not adequately address, or be contrary to, the goals and needs of the members.
Should the powers or purposes of the LLC be limited?
Unless otherwise provided in an operating agreement, an LLC may carry on any lawful business, purpose or activity and may exercise all the powers and privileges necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the LLC.
How will profits and losses be allocated?
Unless otherwise provided in an operating agreement, profits and losses will be allocated on the basis of the agreed value of member contributions.
Can the LLC admit new members?
Unless otherwise provided in an operating agreement, after the LLC formation, a person may be admitted as a member of the LLC only upon the consent of all members.
Can a member be expelled from the LLC?
Unless otherwise provided in an operating agreement, a member can be expelled upon the unanimous vote of the other members, but only in specific circumstances.
Who has authority to bind the LLC?
Unless otherwise provided in an operating agreement, each member has the authority to bind the LLC.
Who will manage the LLC?
Unless otherwise provided in an operating agreement, members manage the LLC (which is different than “centralized” or “corporate-like” management).
Who will make business decisions?
Unless otherwise provided in an operating agreement, a member’s management authority is proportionate to the member’s profit interest in the LLC. For most decisions, the members owning more than fifty percent of the profit interest will control.
May ownership interests be transferred to third parties?
Unless otherwise provided in an Operating Agreement, an LLC interest is assignable, but the party receiving the interest will not have the right to participate in the management of the LLC.
Can a member withdraw from the LLC?
What happens to the member’s interest upon her withdrawal?
The default rules regarding these important questions vary significantly from state-to-state. Under New Jersey law, a member can withdraw from the LLC and may be required to otherwise dissociate from an LLC (e.g., upon death, becoming a debtor in bankruptcy, permitted expulsions, etc.). However, the law provides limited guidance as to withdrawal, dissociation, and valuation and redemption of a member’s LLC interest. Thus, it is particularly important to have a well-drafted Operating Agreement that addresses these critical issues.
In conclusion, an Operating Agreement may address these and other important internal governance matters. LLC members should carefully consider their business goals and objectives, and evaluate whether an Operating Agreement is appropriate for their LLC. Please contact the author if you wish to discuss this article or his practice areas.
This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081