Limited Liability Companies and Operating Agreements

Copyright (c) 2011 Jeffrey Matsen

The Limited Liability Company (LLC) is a flexible form of entity that is designed to provide the protective features of a corporation, with the tax advantages and operational flexibility of a partnership. The LLC is a popular choice for small business owners who are looking to form a limited liability entity simply to protect personal assets, or to secure additional loans. Depending on the individual's goals, an LLC may be 'manager managed' or 'member managed'. A 'manager managed' LLC is structured more like a limited partnership, whereas a 'member managed' LLC is like a general partnership.

What are the main advantages of forming an LLC? * Members and managers of an LLC have limited liability for business debts, whereas, in a limited partnership (LLP), only the partners have limited liability * The allocation of profit and loss of an LLC need not be proportional to membership interests * An LLC is not subject to the threat of double taxation since the LLC is not a separate taxable entity, unlike a corporation * In order to own or invest in an LLC, you do not need to be a US citizen

Is Your LLC's 'Operating Agreement' Sufficiently Worded To Protect Your Personal Assets? Once you've formed a limited liability company (LLC) by filing the Articles of Organization, what's your next step? The most critical component of an LLC is the 'Operating Agreement'. Although an Operating Agreement is technically not required by State law, a detailed Operating Agreement is strongly recommended to protect your hard earned assets. Attorneys have fine tuned their 'manager managed' and 'member managed' Operating Agreements throughout the years, and they can be tailor made to fit your circumstances.

The Operating Agreement may be prepared so that the LLC resembles a general partnership, a limited partnership, a corporation, or any other form its members choose. This operational flexibility makes the LLC an attractive business structure. Do not rely on standard Operating Agreements offered by typical LLC formation companies, since the wording in the Operating Agreement is critical to estate planning principles. In the event of creditors attempting to attach the LLC's assets, protection lies within the Operating Agreement.

A poorly drafted and worded Operating Agreement may cause catastrophic loss of the LLC's assets. What are some critical issues to be addressed in the Operating Agreement? * Whether the LLC will be 'Member Managed' or 'Manager Managed' * Members' Rights * Manager's Rights * Capital Contributions of Members * Financial Records * Allocation and Distribution of Profits or Losses * Dissolution and Winding Down Issues * Transfer of Membership Interests * Other Critical Issues If you are planning to form an LLC, or need a detailed and properly worded Operating Agreement.


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Jeffrey R. Matsen of Wealth Strategies Counsel helps people structure their personal and business assets in the best way possible to protect, preserve and transfer them in the most efficient and tax saving manner. For more information go to http://www.WealthStrategiesCounsel.com