An LLC agreement is a contract which customizes the terms of an LLC as per the needs and requirements of the parties to the contract. An LLC Agreement is a core requirement of a limited liability company. It enumerates the day-to-day functions of the company, highlights what the impact of certain special circumstances might be on the limited liability company and outlines the governance procedures and administrative processes. An LLC contract also lays down the obligations and duties of the members of a limited liability company. While such contract is not legally mandated, companies have them in order to protect their interests.
Purpose of an LLC Agreement
An LLC contract serves the purpose of acting as a blueprint document for the functioning of a limited liability company. Its main purpose is to govern the operations of the limited liability company. It deals with the financial, operational and management aspects of the limited liability company. Inter alia it also governs the relationship of the members of the limited liability company inter se.
Inclusions in an LLC Agreement
An LLC Agreement typically includes the names of the parties or the members of a limited liability company, the terms and conditions under which such company is to be governed, the financials of the company, the human resources strategy and the rights and obligations of the members vis-à-vis among themselves and outside. Additionally, it also includes, standard boilerplate clauses such as waiver, notices, assignment, amendment, severability , dispute resolution and choice of law.
Key Terms in an LLC Agreement
Key terms of an LLC contract are as follows:
- Formation: An LLC contract necessarily as to outline the procedure of formation of a LLC. This includes the share structure, members, paid up capital etc.
- Management and Voting: An LLC contract deals with how the limited liability company is to be managed and how would the voting rights be distributed among the members.
- Capital Contributions: How much capital would each member of a limited liability company contribute is also to be mentioned in the contract. A corresponding shareholding percentage is also mentioned.
- Distribution of profits/losses: A formula or process as to how the profits and losses are to be divided should be included in the contract.
- Changes in Membership: Any alteration in membership of the limited liability company (either new entry or exit), needs to be recorded in an LLC contract.
- Dissolution/Termination: The process of dissolution/Termination of the limited liability company should also be outlined in the contract.
Drafting of an LLC Agreement?
The following guidelines should be followed to draft an effective LLC Agreement sample:
- Mention the members of the limited liability company as the parties to the agreement.
- An LLC agreement is typically, open-ended, hence, termination based on default needs to be included.
- Amendments to the LLC contract should be provided to be in writing and based on mutual consent.
- Financials such as share percentage, capital contribution etc. should preferably be supported by a formula.
Types of an LLC Agreement?
An LLC Agreement is used in all kinds of industries. It is primarily used by startups. Depending upon the industry and the limited liability company for which the LLC contract is being drafted, the terms ad conditions differ.
Pros of an LLC Agreement?
Following are the pros of a LLC contract:
- Limited liability: one of the major benefits of a limited liability company is that the members are not personally liable for the acts of the company and are not personally sued.
- Flexibility in terms of number of owners: An LLC can have multiple owners; hence, the LLC contract helps in governing the relations between them and preventing disputes from arising.
- It documents every minute detail regarding the governing and functioning of a limited liability company. This makes management easy and effective.
- It provides for alteration and hence makes the company dynamic.
An LLC Agreement governs the functioning of a limited liability company. It lays down their rules and regulations, management procedures and processes, governs the relationships between their members and even provides for their dissolution. Given a document of such magnitude and the presence of multiple members, disputes are bound to arise. Such disputes should preferably be settled through arbitration.
[Also Read:LLC Operating Agreement]
Sample LLC Agreement
A sample of the agreement can be downloaded from below.