What Is a Multi-Member Operating Agreement?
Multi-member operating agreements are operating agreements designated for multi-member and co-owned LLCs. These documents outline the rules, regulations, and provisions regarding an LLC’s management of its operations and finances, as well as the requirements for admitting new members. And the same with the company’s articles of incorporation, members can make its provisions final and official by signing the multi-member operating agreement in front of a public notary.
How Do You Complete a Multi-Member Operating Agreement?
Multi-member operating agreements offer a sense of direction to multi-member and co-owned LLCs. It helps the company decide on what to do with liabilities that the company might incur or in the event of the company’s dissolution. Furthermore, these documents also define the company’s ownership structure as well. Listed on the steps below are some tips on how to create an operating agreement for a multi-member company.
1. Introduce the Operating Agreement
The operating agreements for multi-membership LLCs would significantly differ from those that are owned by a single-member. Writing a multi-member operating agreement begins with introducing the agreement, its authors, and the company itself. You have to include names and addresses of the company, the authors of the operating agreement, a brief introduction and background of the company and its purpose, as well as the company’s duration and grounds for dissolution. These elements establish and define the agreement’s purpose and function to the company’s operations and affairs.
2. Outline the Company’s Management Structure
Multi-member LLCs are formed, owned, and operated by its members. And, these limited liability companies can also admit as many investors as their members as well. So, outline the company’s management structure right after introducing the agreement—its authors and its purpose. This includes the definition of the company’s board of directors, their powers, rights, and responsibilities, as well as the requirements for membership and interest transfer. Outlining the structure defines the roles and functions of the members. It also helps members with managing the company’s daily operations and deciding on its affairs as well.
3. Define the Company’s Finances and Capitalization
Multi-member LLCs allow their owners to invite as many members to invest in the business, thus, allowing more room for small businesses to grow. And unlike single-proprietorship and partnerships, these types of companies allow their owners to remove themselves from the company’s liabilities and file separate income tax returns, as well. To do this, define how the company will handle its finances—fiscal year, tax filing, financial accounting process, compensation, debts, and expenses—set its annual and initial capitalization rates and distribute profits and losses among members.
4. Include General Provisions for the Agreement
Like any agreement, a multi-member operating agreement includes general provisions that govern the implementation of the conditions specific to them. These general provisions include the requirements of amending and modifying the operating agreement, severability of particular provisions, handling disputes, attorney’s fees, and notices, as well as the execution of subsequent documents and decisions. These general provisions enable the multi-member operating agreement to consolidate its terms and conditions.
5. Acknowledge the Provisions of the Agreement
Lastly, acknowledge the multi-member operating agreement by executing it with you and other members’ signature. Aside from that, you must also attach the company’s membership list, their respective contributions, their share value, and ownership percentage. These signify the operating agreement’s immediate enforceability and validity. You may also notarize the operating agreement to enforce its terms and conditions further.
Frequently Asked Questions
Why do we need multi-member operating agreements?
Multi-member operating agreements are key documents that guide a multi-member LLC in making crucial management decisions. It also serves as the basis for making policies for its operations, as well. Without it, a multi-member may operate beyond its designated functions and state and federal requirements.
What rights can members have in a multi-member operating agreement?
Under a multi-member operating agreement, members are entitled to the rights and privileges, the same as shareholders in a corporation have. These include cumulative voting rights, rights to the first refusal, the right to acquire additional interests to the company, and so on.
How many members can author and create multi-member operating agreements?
Multi-member operating agreements are usually authored and created by its principal owners, which you can consider as primary members of a multi-member LLC. And likewise, they are also the ones who will execute and sign the multi-member operating agreement.
Can we choose not to notarize multi-member operating agreements?
LLC operating agreements are internal documents of a company; thus, notarization is not necessary for its enforcement. However, some companies do notarize it for formality. If you choose to notarize your multi-member operating agreement, you may include a notarial clause inside the document or attach a separate document on to it.
Should a multi-member operating agreement be based on the company’s articles of incorporation?
Yes. Since an LLC’s articles of incorporation declare the company’s compliance under the state’s requirements of its business structure and formation. Likewise, A multi-member should also be created following the same state and federal requirements on LLC’s operational and management system, as well.
Multi-member LLCs offer vast and boundless opportunities for businesses. And whether you’re looking to expand your business by inviting more investors or turn passion into profit with some friends, foreseeing and planning for its future will guarantee success and further growth. And aside from that, organizing your business’s structure with a multi-member operating agreement will drive you straight into the right direction.