Limited Liability Corporation Agreements
A limited liability company agreement (sometimes mistakenly called a "limited liability corporation agreement) is the managing document that outlines how an LLC is to be run by the managing members, how the profits and losses are to be distributed, and states how the principle members of the company vote. The agreement formally structures the financial agreements of the owners and formalizes the relationship between the co-owners in such a way that best fits the needs of the company.
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Function
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The limited liability company, LLC status enables the company to act like a corporation protecting the member's assets if the company is sued or is unable to pay its bills; only the assets of the company can be touched. The LLC agreement safeguards the company against management misunderstandings. The document gives specifics on how profits and losses (distributive shares) are to be split amongst the members generally according to the percentage of owner liability outlined in the document. The agreement also establishes the framework for how members enter and exit the company.
Considerations
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Without an operating agreement, the LLC is subject to the rules and regulations of the state in which the company resides. According to state law, if a member leaves the company the LLC no longer exist. Without an agreement most states require a corporation to divide the profits and losses fifty-fifty regardless of an individual's investment in the company.
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Voting Rights
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The limited liability company agreement notes when meetings are to be conducted in order to discuss or vote on important company issues which can also include the preparation of the company's annual reports. Voting power of each member generally corresponds to the contribution of cash, property, or services given by its members to start the business. Voting is generally informal, but a formal vote can be conducted depending on the importance of the company's business.
Taxation
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Income for the LLC is reported on the personal income taxes of each individual member of the LLC in proportion to the percentage of their ownership in the company. It is the responsibility of each member to pay their portion of the taxes at the end of the year. An informational tax return must be filed with the Internal Revenue Service.
Expert Insight
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A limited liability agreement is not required, but it is advantageous for the limited liability company to have one drafted. Samples of limited liability agreements can be found on the internet and are easily modified. In the end, the co-owners of the company should seek the advice of an attorney on how to establish an agreement that benefits the company and suits the desires of the co-owners.
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References
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