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.