LLC Agreement Checklist
This Checklist compiles questions to consider before preparing a comprehensive limited liability company (LLC) agreement. The answers to these questions will determine the form of LLC agreement to use, help identify precedents that may be helpful, and identify areas requiring more discussion.
- Is this a single-member or multi-member limited liability company (LLC)?
- Will the LLC use a long or short-form LLC agreement? An LLC's members may enter into one comprehensive, long-form LLC agreement or a series of one or more standalone agreements covering different matters. For an example of a long-form LLC agreement with multiple members and a board of managers, see Standard Document, LLC Agreement (Multi-Member, Manager-Managed).
- Are there majority and minority interests, or are the interests divided evenly amongst the members? Minority and majority parties often have different concerns than members in an LLC with evenly divided interests.
- Who are the LLC's investors? For example, private equity firms typically want more control over management than passive investors.
- Are any of the members key employees? If so, there are often special considerations for those members, such as employment agreements and non-compete provisions.
- Are tax advisors reviewing the LLC agreement? Tax advisors (such as tax counsel) should review the LLC agreement, especially the tax matters section and the allocations and distributions provisions.
Parties and Background
- Are all of the parties identified in the LLC agreement?
- Should the LLC be a party to the agreement? The LLC is usually a party if it has obligations to the members under the agreement.
- Is the LLC agreement effective when signed or on a different date? If the LLC is not yet formed, the agreement is usually effective on company formation.
- Is there any significant or relevant background information to include in the recitals? For example, the parties may want to state the reasons for forming the LLC.
- What is the LLC's name? Does it meet the statutory requirements of its state of formation?
- Has each member provided the member's contact information (mailing address, telephone, fax numbers, email address, and principal contact)?
- If the LLC has not yet been formed, when will it be?
- What is the name and address of the LLC's registered agent for service of process?
- Where is the LLC's principal place of business?
- Will the LLC conduct business in other states besides its state of formation? If so, does the LLC need to file for foreign qualification in those other states?
- What is the LLC's term? The term can be perpetual (subject to early termination as may be specified in the agreement) or for a fixed period.
- How can new members be admitted? For example, does the admission of new members require the managers' consent or a vote of the members?
- Will the LLC agreement provide that the managers can update the agreement to reflect new members?
- What are the limitation of liability and indemnification provisions?
- Can members enter into transactions with the LLC? For example, can the members make loans to the LLC?
- Will there be more than one class of LLC interests?
- Will certificates evidence the LLC interests?
Voting and Action
- Will the members have voting rights? If so, consider the following:
- What matters can they vote on? Members are often given the right to vote on certain significant issues (such as selling all or substantially all of the LLC's assets).
- What vote is required to approve each matter (majority, supermajority, or unanimous)?
- Will the LLC agreement provide for meetings and actions by the members?
Transfers of LLC Interests
- What transfer restrictions will the LLC agreement impose? LLC agreements often contain detailed transfer restrictions.
- Will the LLC agreement impose restrictions on the members from encumbering their LLC interests (such as using them as collateral for a loan)?
- Whose consent will be required to approve a transfer (for example, the managers or the members)?
- What types of transfer and buy-sell provisions will the LLC agreement include?
- Will the LLC include buy-sell provisions in the LLC agreement or in a separate buy-sell agreement?
- If there are buy-sell provisions, did the LLC agreement address valuation and payment methods?
- What are the procedures for admitting additional members?
- Will a member be allowed to withdraw from the LLC? If a member can withdraw, what notice or process must the member follow to withdraw? What liability, if any, will there be for wrongful withdrawal?
- What is the management structure? Will the LLC be managed by its members, one or more managers, or by a separate board of managers?
- Will the LLC be managed by all the members or only certain members or classes of members?
- What are the members' powers?
- What standards of conduct will the members be required to adhere to? If permitted by applicable law, will the members' fiduciary duties be waived?
- Who is the initial manager? The LLC agreement usually identifies the initial manager.
- Will there be more than one manager?
- Are there any limitations on the managers' powers? What management authority or responsibility, if any, will be retained by the members?
- Will the managers be compensated for acting as the managers? The LLC agreement should specify any compensation to which managers will be entitled.
- Can the managers appoint officers and delegate authority?
- What standards of conduct will the managers be required to adhere to? If permitted by applicable law, will the managers' fiduciary duties be waived?
- What will be the form and amount of the members' initial capital contributions?
- When are the initial capital contributions due? Members can make the capital contributions at or before formation, according to a schedule.
- What are the members' liabilities and responsibilities if one member does not make a required capital contribution?
- Will there be penalties or consequences for a member who fails to make a required capital contribution?
- Will the LLC agreement provide for the establishment and maintenance of capital accounts?
- Will the capital account of a transferring member transfer to a transferee on the transfer of part or all of that member's LLC interest?
- Will withdrawals of amounts from a member's capital account be permitted or required?
Allocations and Distributions
- Do certain members or classes of LLC interests have a priority in the waterfall with respect to distributions or allocations?
- How will distributions be made? Similar to allocations of profits and losses, distributions are often made according to percentage ownership or a waterfall provision.
- Besides cash, will the distribution of securities and other LLC property be permitted?
Taxes, Books, and Records
- How will the LLC be treated for US federal income tax purposes? LLCs are generally treated as partnerships.
- Will the LLC agreement include provisions for preparing and filing the LLC's tax returns?
- What is the LLC's fiscal year? LLCs usually operate on a calendar year.
- Who will be appointed as the "partnership representative" and "designated individual" (if applicable) (IRC § 6223)? The LLC agreement generally specifies the designated person's duties and any additional powers.
- Is there a provision addressing tax withholding?
- Does the LLC need an employer identification number (EIN)? If the LLC has more than one member, it must obtain its own EIN regardless of its employees. A single-member LLC also must have an EIN if it elects to be taxed as a corporation rather than a sole proprietorship.
Books and Records
- Will the LLC prepare and distribute monthly quarterly, or annual financial statements or reports? If so, do any or all of them have to be prepared per GAAP, International Financial Reporting Standards, or other accounting conventions?
- What are the policies for preparing and maintaining the LLC's books and records?
- What provisions will the LLC agreement include for members and managers to inspect the LLC's books and records? Members can usually inspect the books and records as a matter of law.
Dissolution and Winding Up
- What events will give rise to a dissolution of the LLC?
- Will the LLC have a perpetual term, or will it exist for a set period?
- What is the member vote required to terminate the LLC?
- Who will take care of the winding up and liquidation process? This is usually handled by the managers or the managers' appointee.
- Is there a need for confidentiality provisions? For example, if the LLC has trade secrets to protect it usually wants the members to agree to maintain them as confidential.
- Is there a need for non-compete provisions? Members, managers, and other key employees are often restricted from competing with the LLC.
- What state's laws should govern the LLC agreement? It is common to pick the laws of the state in which the LLC is formed.
- Will the LLC agreement include deadlock provisions?
- How will the LLC agreement provide for resolving disputes among the members or the members and the LLC? Will the LLC agreement provide for a specific venue and jurisdiction for disputes?
- Is this a new LLC agreement, or is it an amendment and restatement of an existing agreement? If this is an amended and restated agreement, review the current LLC agreement for approval and amendment provisions.
- Is the LLC agreement consistent with applicable LLC law and its formation document (such as the company's certificate of formation)?