18 Aug Oregon LLC Operating Agreements
Oregon LLC Operating Agreements
Limited liability companies (LLCs) are the most popular type of company formed in the State of Oregon, and they continue to become more and more popular, while corporations become less popular. The biggest reason is that there are few corporate formalities that must be observed by LLCs owners. In fact, to start an LLC, the only filing that must be made is the Articles of Organization, which is only a one or two page document that is filed with the Oregon Secretary of State. That’s it.
However, the simplicity of starting an LLC is also one of the biggest obstacles in properly structuring, and managing, an LLC, especially if there’s more than one owner. This is because there is very little law about how LLCs should operate, and so it’s ultimately up to the owners to build out the law themselves, and this is done through the drafting of an Operating Agreement.
When drafted properly, multi-member Oregon LLC Operating Agreements are, at a minimum, typically 20-30 pages in length, and address everything from how to hold meetings to what will happen if one of the owners should decide to sell his or her ownership in the company.
This article explains why Operating Agreements are absolutely critical, particularly in the case of LLCs with more than one owner; why standard form templates are often insufficient; and why certain terms must be addressed.
The Importance of An Operating Agreement
After filing the Articles of Organization with the Oregon Secretary of State, the Oregon LLC will be official, and the owners can technically start doing business under the company name. However, to operate it properly, especially if there is more than one owner, they’ll also want to draft, and file, where necessary, the following documents:
– Complete and file Form SS4 (or simply apply online), to obtain an employer identification number (“EIN”) for the LLC (this allows the company to open a bank account, as well as other company accounts);
– Draft the initial Consent (to formally adopt any initial decisions on behalf of the LLC);
– Draft a Contribution and Assignment Agreement (this ensures that any intellectual or other property that has already been established will be contributed to the LLC so that none of the founders later try to claim that property as their own);
– Draft a Membership Ledger (to verify which owners own which percentage of the LLC, and how much they respectively contributed to the LLC in exchange for those percentages); and
– Last, draft a thorough and complete Operating Agreement.
Operating Agreements, when properly drafted, explain exactly how the LLC will be run, on a day-to-day basis, how major decisions will be made, and the exact rights and responsibilities that each owner will have in the company. Unlike the Articles of Organization, which are a standard form filing, every Operating Agreement is unique.
Beware of Standard Form LLC Operating Agreement Templates
Operating Agreements should not be viewed as fill-in-the-blank templates. Rather, Operating Agreements should be drafted as customized, unique documents, built around the exact type of company that is being formed, and the exact types of legal issues the company’s owners believe may need to be addressed. Any issues not addressed in the Operating Agreement will be unresolved, and may later lead to significant internal disputes.
For example, in the case of two owners who start an LLC and who fail to address noncompetition provisions in the Operating Agreement, one of the co-owners may decide to go off and start a competing company with little, if any, legal recourse being available to the other co-owner since noncompetition provisions were never addressed.
Another example of a critical issue is voting rights. Ownership in an LLC can be split up in any way the owners wish to do so, and the owners don’t even have to pay proportionate amounts for their interests. The interests that get issued are referred to as “units” in LLCs (units are sort of like stock in a corporation), and units can be issued with any sort of rights the owners apply to those units, which may include voting and non-voting rights, and preferences on liquidation of the company. A failure to distinguish between different types of units in the Operating Agreement allows all owners to have equal say, regardless of the owners’ initial intentions.
Apart from noncompetition provisions and voting rights, the list of critical issues to address in Operating Agreements — especially multi-member LLCs — or to at least consider addressing, includes the following:
– Will the LLC be manager-managed of member-managed?
– If the LLC will be manager-managed, who will be that manager?
– How many units will be issued, and how many units will be issued to each owner?
– What will each owner contribute in exchange for his or her units?
– Will the LLC have officers, and, if so, who will they be?
– Under which specific events will the consent of a majority and / or all of the members be required?
– Will the members owe a duty of loyalty to the company, and will they be allowed to compete with the company?
– Will the company indemnify the members and / or managers?
– Will the company be taxed as a partnership or as an S corporation? If as a partnership, how will the profits and losses be allocated, and will the members receive guaranteed payments?
– Will members have preemptive rights in the case the company issues out additional units?
– Can members be expelled from the LLC, and, if so, under which circumstances?
– How will disputes be resolved? Will there be mandatory arbitration?
– Will the transfer of units be restricted, or will the members be freely allowed to sell their units to anyone?
– Will the members have rights of first refusal and / or rights of first offer?
– Will there be mandatory and / or call option triggering events in the case of certain events, such as the death, disability or bankruptcy of members?
– How will the price of the units be determined in the case of such events?
– Will there be a forced sale provision or coin toss provision in the case of a deadlock?
– Will members have drag along rights and tag along rights in the case of sales of units to outside investors?
– Will members have obligations to protect confidential information?
For owners of multi-member LLCs, the above list should be reviewed and discussed in detail with all of the other owners before the business starts operating. It’s critical to have these discussions at the outset because that’s when everyone will be the most excited about running the company together, and no disputes will yet have taken place, which will allow the owners to put together a fair, and well-constructed Operating Agreement.
Author: Andrew Harris
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