Now that This Week in Real Estate has discussed the history and traits of the LLP and LLC and the Freedom of Contract, this week’s edition will focus on the top 10 most important non-tax issues that should be addressed in partnership or operating agreements for LLPs or multi-member LLCs.
- Identification of the partners/members. The agreement should begin with a statement of the names and addresses of the partners or members and their legal status—e.g., as individuals, entities, or trusts.
- Statements of background. The agreement should provide at least a brief statement of the background of the agreement, including a general statement as to the nature of the business to be conducted. This statement will provide partners, members and managers, and third parties, such as lenders, judges, and arbitrators, with a context for understanding the provisions of the agreement.
- Partner/Member economic issues. The agreement must contain comprehensive provisions concerning the members’ or partners’ contributions to the LLC or LLP, respectively, allocations and distributions, redemptions, and cross-purchases of limited partnership or membership interests upon dissociation.
- Transfers and grants of partnership and membership rights. The agreement must specify the rules that will govern transfers by the partners or members of their rights to other partners or members and to third parties (including heirs) and the admissions of new partners or members.
- Events of dissociation. The agreement should specify which events will cause the partners or members to be dissociated—i.e., to cease to be partners or members, and they should specify the consequences of these dissociations. The principal types of events of dissociation are resignation, death, bankruptcy, disability, expulsion, dissolution (in the case of entities), and revocation (in the case of trusts).
- Management provisions. In the partnership agreements of LLPs and operating agreements of member-managed LLCs—i.e., LLCs in which all members may vote on all LLC issues and may sign LLC contracts—no specialized management provisions will normally be needed. However, such provisions must be included in the operating agreements of manager-managed multi-member LLCs. These will include, for example, provisions concerning the qualifications that individuals and entities must meet in order to be managers, manager appointments, resignations and removals, and the allocation of decision-making between the managers and the members.
- Fiduciary duties. The agreement must specify the fiduciary duties of the partners or members to one another and to the entity and those of the managers to the members and to the LLC in manager-managed multi-member LLCs. The main such duties are those of care and loyalty.
- Dissolutions. The agreement must specify the rules that will govern the dissolution, winding up, and liquidation of the LLC or LLP.
- Miscellaneous. Every good agreement must contain several key boilerplate provisions. The most important of these is an “integration provision,” providing that the agreement contains the entire agreement of the members or partners about the LLC or LLP and a provision that the agreement may be amended only in writing signed by all of the members or partners.
- Dispute resolution. The agreement must specify the method that the partners, members, and managers must use to resolve internal disputes and the venue for dispute resolution.
ABOUT JAMES LANDON
Jim Landon has practiced real estate law since 2002 and has been involved in real estate investment and construction for most of his life. Jim’s practice focuses on real estate transactions and land use.
Jim represents individuals and privately and publicly held companies in the purchase, sale, leasing, financing, and development of real property. He also represents title insurance companies on commercial purchases and refinancing transactions, as well as providing third-party legal opinions regarding Delaware law related to Delaware entities.
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