Franchise Lawyer Blog

LLC Operating Agreements

Franchisors, franchisees, area developers, multi-unit developers and any other operator in the franchising space invariably operate in the form of a company, a business entity. The currently preferred entity for conducting business is the limited liability company, which offers its owners, known as members, a shield from liability while at the same time avoiding the double taxation that can be the bane of corporate existence. It is possible to avoid double taxation in the corporate form by electing to treat one’s corporation as an “S” Corp., but there are restrictions on the use of S Corps (S Corps may only have individual owners and a limited number of them, for example) that make them not quite as useful as the LLC. LLC’s are also more flexible in terms of ownership and management.

LLC’s are governed by operating agreements. When we sit down with clients to discuss how to structure their operating agreement, without some firm guidance the conversation can go spinning off in innumerable different directions. People who decide to go into business together typically do not think about exactly how they are going to manage that business, nor what they are going to do down the road if someone wants to quit or retire, sell their interest, or in the unfortunate event someone is disabled or dies.

One of the hurdles to giving good advice is how to obtain the information you need to do so in an efficient manner. We have found that clients like to respond to questionnaires. They can me made to be brief, to the point, with simple questions. We have a limited liability company questionnaire that enables a layperson to walk through a series of questions that will both focus him or her on the issues that the agreement is concerned with and hopefully extracts from that person the information necessary for us to draft an operating agreement for their enterprise. It looks like this at the start:

Limited Liability Company

Operating Agreement Questionnaire

Below is a list of questions that would help us prepare an operating agreement for your Limited Liability Company (“LLC”). Do your best to fill out the questionnaire with as much information as you can. If you do not understand any of the questions or are unsure as to how to answer the question, do not hesitate to contact us to discuss that question in more detail.

1. a) Name of the Limited Liability Company:

b) State of Formation:

2. Does the LLC intend on doing business under an assumed name? If so, please state the intended assume name:

3. LLC’s Address:

4. List the LLC’s Members and their addresses:

5. State each Member’s initial ownership percentage (total must equal 100%):

The questions become somewhat more involved, asking abiout management, succession of control, sale of interests, additional capital contributions, termination and a host of other issues. But by breaking down the discussion point by point, we are able to obtain what we need to provide people with a comprehensive document.

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