What if we don't have an Operating Agreement?

Limited Liability Company law allows a great deal of flexibility, but it includes a number of default provisions that apply unless there is an agreement to the contrary. It should be noted that since an Operating Agreement must be in writing (if it exists at all) an oral agreement to do something different from the default provisions is presumed to be both void and unenforceable. The default provisions include some rules that you may not want. For example, unless there is an agreement to the contrary, distributions to the members must be equal. Thus, if A puts in 80% of the capital and B puts in 20%, they each get 50% of the money distributed unless the Operating Agreement says otherwise. Most clients will neither expect nor want this result. It is therefore important to have a written agreement to deal with these issues.

What does a member have to put in?

There is no minimum amount of capital required to become a member, and the voting power of a member does not have to be related to his or her capital contribution. A member's contribution to the capital of an LLC can be in cash, property (real or personal, including intangibles), or in the form of services. A member's obligation to contribute capital is not excused by the member's death; it becomes an obligation of his estate. Generally, creditors of the entity can enforce the obligations of the members to make capital contributions, but only to the extent that the entity itself could enforce such obligations. For example, assume that A agrees to pay $10,000 as his capital contribution, payable at the rate of $2,000 per year for five years. A has only paid $6,000 at the time that X obtains a judgment against the LLC. X can compel A to put in the remaining $4,000 according to the original schedule, but cannot compel him to accelerate the payments or to put in any more than $10,000, even if the judgment remains unsatisfied.

What are the tax effects of contribution of property?

In general, a transfer of property to a partnership (including an Limited Liability Company that is treated as a partnership) in exchange for a partnership interest will not result in the recognition of gain or loss. The tax basis of the contributor in the property becomes the partnership's basis. The partner's basis in the partnership interest acquired is also equal to the partner's pre-contribution basis in the property.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.