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PROVISION 1
Free Transferability of Membership Units to Family Members
EXPLANATION: Most standard operating agreements restrict the
transfer of membership units by members to others without the
approval of at least some percentage vote of all members.
However, in some cases, the members may want to allow each
member to be able to transfer his or her membership interests to
a family member without requiring the approval of the other
members. This provision allows for this.
PROVISION 2
Provisions Addressing Transfer of Units Upon Death of a Member
EXPLANATION: Most standard operating agreements do not address
what happens upon the death of a Member and leave it up to the
state laws to determine this issue. However, some LLC members
like to address this in the LLC Operating Agreement or choose to
change what the state statute says for their LLC.
PROVISION 3
Mandatory Indemnification Provision: Requires the LLC to
Indemnify all Members and Managers who operate the LLC Business
for expenses and liabilities associated with the LLC.
EXPLANATION: If you want your LLC to always cover the expenses
and liabilities of a Member or Manager (or of all of them) in
the event that Member or Manager is sued for activities
conducted in the operations of the LLC, you can add this
indemnification provision.
PROVISION
4
Right of First Refusal Provision
EXPLANATION: This gives the Members
and then the LLC the right to step in the shoes of a buyer who
is interested in buying the membership units of another Member
desiring to sell his Membership Units. The Standard
provision in The LLC Expert Operating Agreement Form requires
that Members need to vote on the ability for a Member to
transfer his membership units to a third party. This is by far
the most common provision because it is reasonable for the
existing members to control who owns and has rights in the LLC
(member compatibility). However, some LLCs want to balance
the above concern regarding member compatibility with the need
of the members for liquidity (i.e., the ability to sell their
ownership interests to obtain cash). This balance is usually
addressed with a Right of First Refusal Provision
PROVISION 5
Drag Along Provision
EXPLANATION: This is an advanced LLC Operating Agreement
provision which allows Members holding more than a majority of
the Membership Units to require the other Members to sell their
Membership Units to a third party. This provision is relevant if
there is an intention to later sell the Company to a third
party. If the majority of LLC owners want to sell, this
provision allows them to require that the other Members to sell
their Membership Units so that the entire company can be sold to
a prospective buyer of the company.
PROVISION 6
Tag Along Provision
EXPLANATION: This is an advanced LLC Operating Agreement
provision which allows any Member to require that his Membership
Units be included in the sale by another Member to a third
party.
PROVISION 7
Member Buy Sell Provision upon Disassociation of Member
EXPLANATION: This Buy Sell Provision requires that a Member sell
his Membership Units to the other Members or to the LLC upon a
disassociation event. This is a provision used to ensure that
the Members of the LLC remain ones that are active and in good
standing as it is commonly agreed upon by Members that a
disassociation event is a reasonable event to trigger a buy sell
provision.
PROVISION 8
Member Buy Sell Provision upon Dispute of Two Members
EXPLANATION: This Buy Sell Provision addresses deadlock
situations in a two Member owned LLC. This provision forces the
acquisition by one Member of the Membership Units of the second
Member as a method for resolving a deadlock. This provision only
applies if there are two members in an LLC and they have equal
ownership and control or the LLC Operating Agreement otherwise
requires the approval of both Members for an LLC decision. This
provision is known as the Texas shotgun provision because one
member can initiate a forced sale by offering a price to buy out
the other member. The other Member then has the option to sell
his Membership Units at the offered price or to purchase the
other Member’s Membership Units at the offered price.
PROVISION 9
Arbitration Provision for Member Disputes
EXPLANATION: If Members have disputes among themselves related
to their rights and obligations as Members and they cannot
resolve the disputes, the next step is going to the legal
courts. Filing lawsuits are very expensive and can take a long
time. Arbitration can be a cheaper and quicker alternative to
resolve disputes. This provision requires Member disputes to be
resolved by arbitration.
PROVISION 10
Principal Tax Advisor Provision
EXPLANATION: If your LLC is going to be engaging in more
advanced tax planning based on the advice of an advisor, it is
sometimes preferred to have a principal tax advisor provision in
the LLC Operating Agreement so the LLC has an agreed upon
procedure for retaining an advisor in this important role.
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