Why do new LLC members need to review the LLC operating agreement?

The LLC operating agreement contains vital information that every new member should familiarize themselves with before agreeing to be a member. Some of the issues that are addressed are as follows:

  • Contributions – What contributions were made by each member, and are there future expected contributions? If there are future contributions, when are they due and what happens if they are not made?
  • Profits and losses – The operating agreement should specify how profits and losses are allocated among the members.
  • Stock ownership – Since an LLC is allowed to designate multiple classes of stock, there should be information about stocks and what preference is given to each class upon making distributions or a liquidation of the LLC.
  • Management of the LLC – New members should be aware of whether the LLC is being managed by all members, by a sole manager, or by a group of managers.
  • Officers – It is imperative for new members to understand how the officers of the company are  appointed, as this differs greatly between LLCs.
  • Voting rights – Before agreeing to membership in an LLC, a member should review the operating agreement on how voting for major events is handled, such as the sale of the business, changes in membership, and any capital contribution requirements.
  • Indemnification – Operating agreements typically contain language specifying what indemnification protections are offered for anyone who is handling the management and operations of the business.
  • Transfers – It is important for incoming members to understand any restrictions on transfers of membership interests (or units). Transfers may occur when a member wishes to divest its interest, after the incapacitation or death of a member, or when the other members vote to remove a member.
  • Common procedures – Reviewing the procedures for conducting member meetings, dissolving the business, and other common actions that may be taken by the LLC will provide new members with a thorough understanding of their rights and obligations.
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