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What To Include In Your Limited Liability Company's Operating Agreement

In a limited liability company (LLC), if no operating agreement (the agreement between the members of the LLC) is in place, the limited liability company statute of the state where the LLC was formed controls the relationship between the members of the Company.

It is important that the members cover as much as possible in the Operating Agreement, rather than relying on the default provisions in the LLC statute. One example of what can happen if there is no Operating Agreement (or the Operating Agreement is silent on a particular issue) is what happens if a member of a limited liability company (LLC) wants to resign.

If the Company is a New Jersey LLC, if the Operating Agreement (the agreement between the members of the LLC) is silent, a member can resign by providing six months' notice to the Company and the other members, and is then entitled, within a reasonable time, to get paid the fair value of the resigning member's interest.

If the Company is a Delaware LLC, if the Operating Agreement is silent, a member is not entitled to resign (and would thus not be entitled to a payment for the value of the member's interest until the interest is sold or the Company is dissolved).

This shows that the members of an LLC should make clear what they would want to happen if one of the members wants to resign, so that they are not in danger of having the "default" provisions of the LLC statute, which are different from state to state, instead of their own wishes, govern the operations of the Company.

Full post as published by New Jersey Law Blog on September 19, 2008 (boomark / email).