LLC Agreement Commentary

by Practical Law Corporate & Securities

A Practice Note that provides a comprehensive overview of the principal provisions in a multi-member limited liability company (LLC) agreement, also known as an operating agreement. This Practice Note focuses on LLCs treated as partnerships for US federal income tax purposes and explores key drafting considerations for members, managers, and their legal counsel. It examines fundamental sections including the formation and purpose of the LLC, members' rights and obligations, management structures, and capital contributions. The guidance delves into the intricacies of capital accounts, the allocation of profits and losses, and the structuring of distribution waterfalls. Furthermore, this Practice Note discusses highly negotiated clauses governing the transfer of LLC interests, such as rights of first refusal (ROFR), rights of first offer (ROFO), drag-along rights, and tag-along rights. It also addresses crucial tax matters, indemnification, the waiver of fiduciary duties, and provisions for non-compete clauses, pre-emptive rights, and buy-sell arrangements, providing valuable insights for structuring these complex agreements.