Before you agree to take the plunge to expand your solely owned limited liability company into a multi-member limited liability company, you should consider important issues that should be discussed with your new partner(s) prior to any transaction taking place. Many solely owned limited liability companies do not have an operating agreement in place, and if they do, it probably is not sufficient to address the complexities involved in a multi-member LLC. An operating agreement is a document that sets forth the requirements for administration and management of the LLC. A solely owned LLC operating agreement is drafted much differently than a multi-member LLC operating agreement. If you are considering adding a partner to your LLC, there are some things that should be considered and reflected in an operating agreement or an amendment to the existing operating agreement.
Most importantly, the operating agreement should set forth the ownership interests of the members and the management duties. For example, will all of the members be entitled to oversee the day-to-day management of the company, or will one member be designated as the “manager” and trusted with the daily management duties? In addition, what will the new members be required to contribute to the company to become owners? This is especially important if you have spent years of blood, sweat, tears, and investment to establish your success. Of course, contributions may be offset, to a degree, by the price the member is paying you to acquire a portion of your ownership.
Another issue to consider is what type of major decisions will require a vote of the members, and what percentage will be needed for approval. The operating agreement should dictate the percentage of votes required in order for the LLC to borrow money, lend money, sell a substantial portion of the business assets, file bankruptcy and dissolve. In addition, how will distributions be determined and shared amongst the members? If the members are investing in the business, they will want to know when and how they will receive a return on the investment, and of course, how much of the pie they can expect to receive. You will also want to make sure you have secured your return on your investment in writing.
Without a properly drafted multi-member operating agreement, the New Jersey Limited Liability Act governs the management and operations of the company. If you agree to transfer some of your ownership without a multi-member operating agreement containing the necessary provisions, the other members could potentially take over management, bind the LLC to contracts and agreements with third parties, incur liabilities and debt, lend money, transfer their membership interests to another party and, under some circumstances, file bankruptcy. It is important to properly protect your business that you’ve worked hard to develop, so before you start selling your ownership interests, speak with an attorney about drafting an operating agreement that will provide you with the security needed for continued future success.