Member Llc Operating Agreement Form

SINGLE MEMBER LLC INDIVIDUAL MEMBER FORM LIMITED LIABILITY COMPANY AGREEMENT OF ______________________________ LLC TABLE OF CONTENTS 1. 2. 3. 4. 5. 6. Name; Formation................................................................................................................. 1 Purpose ................................................................................................................................ 2 Powers of the Company ...................................................................................................... 2 Member ............................................................................................................................... 4 Powers of Member .............................................................................................................. 4 Management ........................................................................................................................ 5 6.1 6.2 6.3 6.4 6.5 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Management of the Company ................................................................................. 5 Powers of the Managing Member ........................................................................... 6 No Management by Other Persons or Entities ........................................................ 6 Reliance by Third Parties ........................................................................................ 6 Records and Information......................................................................................... 6 Term; Dissolution................................................................................................................ 7 Capital Contribution............................................................................................................ 8 Additional Contributions..................................................................................................... 9 Allocation of Profits and Losses; Tax Status ...................................................................... 9 Personal Services................................................................................................................. 9 Distributions ...................................................................................................................... 10 Assignments ...................................................................................................................... 11 Resignation........................................................................................................................ 12 Admission of Additional Members ................................................................................... 13 Liability of Member .......................................................................................................... 13 Exculpation and Indemnification ...................................................................................... 13 17.1 17.2 Exculpation............................................................................................................ 13 Duties and Liabilities of the Member.................................................................... 14 i TABLE OF CONTENTS (cont’d.) 17.3 17.4 17.5 17.6 18. 19. 20. 21. Indemnification ..................................................................................................... 14 Expenses................................................................................................................ 14 Insurance ............................................................................................................... 14 Other...................................................................................................................... 15 Outside Business ............................................................................................................... 15 Amendment ....................................................................................................................... 15 Governing Law.................................................................................................................. 15 Miscellaneous.................................................................................................................... 15 ii SINGLE MEMBER LLC INDIVIDUAL MEMBER FORM THIS FORM IS DESIGNED TO COMPLY WITH THE REQUIREMENTS OF THE DELAWARE LIMITED LIABILITY COMPANY ACT AND OTHER APPLICABLE DELAWARE LAW. IN THE EVENT ANY PRACTITIONER INTENDS TO UTILIZE THIS FORM TO ORGANIZE A LIMITED LIABILITY COMPANY UNDER THE LAWS OF A JURISDICTION OTHER THAN DELAWARE, THE LIMITED LIABILITY COMPANY ACT AND ALL OTHER APPLICABLE LAWS OF THAT JURISDICTION WILL NEED TO BE CAREFULLY REVIEWED AND COMPARED TO THOSE OF DELAWARE AND, AS NEEDED, THIS FORM WILL NEED TO BE MODIFIED TO CONFORM WITH ALL APPLICABLE LEGAL REQUIREMENTS AND TO INSURE THAT THE INTENT OF THE PARTIES IS CARRIED OUT UNDER THE LAWS OF THE APPLICABLE JURISDICTION. LIMITED LIABILITY COMPANY AGREEMENT OF _____________________ LLC THIS LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”) of ____________________ LLC, is entered into as of the ______ day of _____________, ____, by ____________________, as the sole member of the limited liability company (the “Member”). The Member is executing this Agreement for the purpose of forming a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.), as amended from time to time (the “Delaware Act”), and hereby certifies and agrees as follows: 1. Name; Formation. The name of the limited liability company formed hereby is ________________ LLC (the “Company”). The Company shall be formed pursuant to this Agreement and upon the filing of a certificate of formation of the Company with the Secretary of State of the State of Delaware setting forth the information required by Section 18-201 of the Delaware Act.1 Each of the Managing Member (as hereinafter defined) and _____________ is 1 Comment: Section 18-201 of the Delaware Act requires that the certificate of formation state the name of the LLC and the address of the registered office and name and address of the registered agent for the LLC located in the State of Delaware. Because these matters are required to be addressed in the certificate of formation, other than the name, (continued . . .) hereby designated as an authorized person, within the meaning of the Delaware Act, to execute, deliver and file the certificate of formation of the Company, and any action taken prior to the execution of this Agreement in connection therewith by either such person is hereby ratified and confirmed. 2. Purpose. The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, engaging in any lawful act or activity for which limited liability companies may be formed under the Delaware Act and engaging in any and all activities necessary or incidental to the foregoing.2 3. Powers of the Company.3 (i) The Company shall have the power and authority to take any and all actions necessary, appropriate, advisable, convenient or incidental to or for the furtherance of the purpose set forth in Section 2, including, but not limited to, the power: (a) to conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Delaware Act in any state, territory, district (. . . continued) they have not been included in this Agreement for the sake of simplicity and to avoid unintentional inconsistency. 2 Comment: The purpose clause of an LLC Agreement is significant because it delimits the activities in which the LLC may engage. The two basic approaches are to utilize a general purpose clause permitting the LLC to engage in any lawful activities or to utilize a specific purpose clause permitting the LLC only to engage in the specific activity for which it was formed and any necessary or incidental activities. The benefit of the former clause is that the LLC has the power and authority to engage in any lawful activity that may present itself whether or not it was initially contemplated. Conversely, the benefit of the latter clause is that it ensures that the LLC will only be used for the previously agreed activity unless the purpose clause is amended. Comment: The powers clause of an LLC Agreement is significant because, together with the governing statute, it establishes the power and authority of the LLC to act. The powers clause should conform to the purposes clause so that the LLC has the power and authority to accomplish its stated purpose. Thus, a broad powers clause should accompany a general purpose clause. Generally speaking, the powers clause either provides that the LLC shall have all the power and authority to pursue its purpose, specifically lists each power and authority that may be necessary or desirable to pursue that purpose or includes both general language and a specific list of enumerated powers. This last approach, adopted by this Agreement, is probably most useful and the goal is to ensure that the LLC has power and authority to take any action relating to any lawful activity. 3 2 or possession of the United States, or in any foreign country that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company; (b) to acquire, by purchase, lease, contribution of property or otherwise, and to own, hold, operate, maintain, finance, improve, lease, sell, convey, mortgage, transfer, demolish or dispose of any real or personal property that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company; (c) to enter into, perform and carry out contracts of any kind, including, without limitation, contracts with the Member or any person or other entity that directly or indirectly controls, is controlled by, or is under common control with the Member (any such person or entity, an “Affiliate”), or any agent of the Company necessary to, in connection with, convenient to, or incidental to, the accomplishment of the purpose of the Company. For purposes of the definition of Affiliate, the term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting securities or otherwise; (d) to purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in or obligations of domestic or foreign corporations, associations, general or limited partnerships (including, without limitation, the power to be admitted as a partner thereof and to exercise the rights and perform the duties created thereby), trusts, limited liability companies (including, without limitation, the power to be admitted as a member or appointed as a manager thereof and to exercise the rights and perform the duties created thereby), and other entities or individuals, or direct or indirect obligations of the United States or any foreign country or of any government, state, territory, governmental district or municipality or of any instrumentality of any of them; (e) to lend money for any proper purpose, to invest and reinvest its funds, and to take and hold real and personal property for the payment of funds so loaned or invested; (f) to sue and be sued, complain and defend and participate in administrative or other proceedings, in its name; (g) to appoint employees and agents of the Company, and define their duties and fix their compensation; (h) insurance; (i) to cease its activities and cancel its insurance; to indemnify any person or entity and to obtain any and all types of (j) to negotiate, enter into, renegotiate, extend, renew, terminate, modify, amend, waive, execute, acknowledge or take any other action with respect to any lease, contract or security agreement in respect of any assets of the Company; (k) to borrow money and issue evidences of indebtedness, and to secure the same by a mortgage, pledge or other lien on any or all of the assets of the Company; 3 (l) to pay, collect, compromise, litigate, arbitrate or otherwise adjust or settle any and all other claims or demands of or against the Company or to hold such proceeds against the payment of contingent liabilities; and (m) to make, execute, acknowledge and file any and all documents or instruments necessary, convenient or incidental to the accomplishment of the purpose of the Company. (ii) The Company may merge with, or consolidate into, another Delaware limited liability company or other business entity (as defined in Section 18-209(a) of the Delaware Act) upon the approval of the Member, in its sole discretion. 4. Member. The name and the business, residence or mailing address of the Member of the Company are as follows: Name: Address: 5. Powers of Member. The Member shall have the power to exercise any and all rights and powers granted to the Member pursuant to the express terms of this Agreement. Except as otherwise specifically provided by this Agreement or required by the Delaware Act, the Managing Member (as hereinafter defined) shall have the power to act for and on behalf of, and to bind, the Company. Each of the Managing Member and ____________________ is hereby designated as an authorized person, within the meaning of the Delaware Act, to execute, deliver and file any amendments and/or restatements to the certificate of formation of the Company and any other certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business. 4 6. Management. 6.1 Management of the Company.4 (i) The Member shall be the managing member of the Company (the “Managing Member”) and, in such capacity, shall manage the Company in accordance with this Agreement. The Managing Member is an agent of the Company’s business, and the actions of the Managing Member taken in such capacity and in accordance with this Agreement shall bind the Company. (ii) The Managing Member shall have full, exclusive and complete discretion to manage and control the business and affairs of the Company, to make all decisions affecting the business and affairs of the Company and to take all such actions as it deems necessary or appropriate to accomplish the purpose of the Company as set forth herein. The Managing Member shall be the sole person or entity with the power to bind the Company, except and to the extent that such power is expressly delegated to any other person or entity by the Managing Member, and such delegation shall not cause the Managing Member to cease to be the Member or the Managing Member. There shall not be a “manager” (within the meaning of the Delaware Act) of the Company. (iii) The Managing Member may appoint individuals with or without such titles as it may elect, including the titles of President, Vice President, Treasurer, Secretary, and Assistant Secretary, to act on behalf of the Company with such power and authority as the Managing Member may delegate in writing to any such persons. 4 Comment: The two most common structures for management of a single member LLC are management by the member (who may be designated a “managing member”) or management by one or more managers. A manager may or may not be the member. If more than one manager is designated, the LLC Agreement will need to provide procedures by which the managers act including specifying what vote is required for action, e.g., majority of the managers or some higher vote. It should also be noted that in the context of a corporate subsidiary, there is sometimes a desire that the management structure of the LLC replicate to the maximum extent possible a corporate structure. Thus, the LLC may have a board of managers (the managers may even be denominated directors) and the LLC may have “bylaws” comparable to corporate bylaws providing for, among other things, action by the board of managers. Comment: It is also important to note any formalities with respect to management that are created in an LLC Agreement must be observed in order to limit the risk that a court will pierce the LLC veil in the event its assets are insufficient to satisfy its liabilities. Thus, if an LLC Agreement establishes a manager and provides that the manager shall take all action on behalf of the LLC, then all such action should be taken by the manager and the member should not act for the LLC unless it is doing it in its capacity as the manager. 5 6.2 Powers of the Managing Member. The Managing Member shall have the right, power and authority, in the management of the business and affairs of the Company, to do or cause to be done any and all acts deemed by the Managing Member to be necessary or appropriate to effectuate the business, purposes and objectives of the Company, at the expense of the Company. Without limiting the generality of the foregoing, the Managing Member shall have the power and authority to: (i) establish a record date with respect to all actions to be taken hereunder that require a record date be established, including with respect to allocations and distributions; (ii) bring and defend on behalf of the Company actions and proceedings at law or in equity before any court or governmental, administrative or other regulatory agency, body or commission or otherwise; and (iii) execute all documents or instruments, perform all duties and powers and do all things for and on behalf of the Company in all matters necessary, desirable, convenient or incidental to the purpose of the Company, including, without limitation, all documents, agreements and instruments related to the making of investments of Company funds. The expression of any power or authority of the Managing Member in this Agreement shall not in any way limit or exclude any other power or authority of the Managing Member that is not specifically or expressly set forth in this Agreement. 6.3 No Management by Other Persons or Entities. Except and only to the extent expressly delegated by the Managing Member, no person or entity other than the Managing Member and the Member shall be an agent of the Company or have any right, power or authority to transact any business in the name of the Company or to act for or on behalf of or to bind the Company. 6.4 Reliance by Third Parties. Any person or entity dealing with the Company or the Managing Member or the Member may rely upon a certificate signed by the Managing Member as to: (i) the identity of the Managing Member or the Member; (ii) the existence or non-existence of any fact or facts that constitute a condition precedent to acts by the Managing Member or the Member or are in any other manner germane to the affairs of the Company; (iii) the persons who or entities that are authorized to execute and deliver any instrument or document of or on behalf of the Company; or (iv) any act or failure to act by the Company or as to any other matter whatsoever involving the Company or the Member. 6.5 Records and Information. Unless otherwise required by a mandatory provision of law, neither the Company, the Member nor the Managing Member shall have any obligation to maintain any books or records of the Company; provided that the Managing Member may keep 6 books and records of the Company and may, from time to time, designate recordkeeping requirements for the Company.5 7. Term; Dissolution. The term of the Company shall be perpetual unless the Company is dissolved and terminated in accordance with this Section 7. The Company shall dissolve, and its affairs shall be wound up, upon the first to occur of the following: (a) the written consent of the Member, (b) the occurrence of any event other than the death or incompetency of the Member that terminates the continued membership of the Member without the admission of a successor member to the Company or (c) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act. In the event of the death or incompetency of the Member, the Company shall not dissolve but the personal representative (as defined in the Delaware Act) of the Member shall agree in writing to continue the Company and to the admission of the personal representative of the Member or its nominee or designee to the Company as a member, effective as of the death or incompetency of the Member.6 Upon the dissolution of the Company, the 5 Comment: Section 18-305 of the Delaware Act provides, as a general matter and subject to certain exceptions, that each member of an LLC has the right to certain specified information. Thus, implicit in this section is that the LLC must maintain the required information. However, the application of Section 18-305 in the context of a single member LLC will be different from its application in a multi-member LLC. Certain of the requirements are simply inapplicable, e.g., provision of income tax returns, and, in any event, the member of a single member LLC is arguably the only person with standing to enforce the provisions of Section 18-305 and, consequently, should be able to waive those provisions by agreeing that no information needs to be maintained by the LLC. However, the practitioner should consider the application of Section 18-305 in the context of his or her specific circumstances. Comment: It is also important to note that if any recordkeeping requirements are created, that they be observed in order to limit the risk that a court will pierce the LLC veil in the event its assets are insufficient to satisfy its liabilities. In this regard, some record keeping may be desirable to establish the Company as an entity separate and apart from the Member. It should also be noted that in the event the practitioner forms an LLC under the laws of a jurisdiction other than Delaware, that jurisdiction may have other requirements related to recordkeeping. 6 Comment: The dissolution provisions set forth in Section 7 are designed to ensure the continuation of the Company to the maximum extent possible. They do this by including, in reliance on Section 18-801(a)(4)a of the Delaware Act, a requirement that the personal representative of the Member agree to continue the Company upon the death or incompetency of the Member and to the admission of the personal representative of the Member or its nominee or designee to the Company as a member. “Personal representative” is defined in the Delaware Act to mean, as to a natural person, the executor, administrator, guardian, conservator or other legal representative thereof. Thus, upon the death or incompetency of the Member, the personal representative of the Member or its nominee or designee will be admitted to the Company as a member and the Company will continue without dissolution. Such new member will be acting in a (continued . . .) 7 Managing Member shall wind up the Company’s affairs and distribute its assets as provided in the Delaware Act.7 Upon the completion of the winding up of the Company, the Managing Member shall file a certificate of cancellation with the Secretary of State of the State of Delaware canceling the Company’s certificate of formation at which time the Company shall terminate. 8. Capital Contribution. The Member has contributed the following amount, in cash, and no other property, to the Company: $____________ (. . . continued) representative capacity only for the beneficiaries of the estate of the Member, in the case of the Member’s death, or for the Member himself in the case of his incompetency. Note that under Section 13 of this Agreement, the incompetency of the Member results in his automatic resignation, consistent with the continuation provisions in Section 7. Alternatively, Section 18-801(a)(4)b of the Delaware Act provides that at any time there are no members a substitute member may be admitted to the LLC in the manner provided for in the LLC Agreement pursuant to a provision that specifically provides for the admission of a substitute member after there is no longer a remaining member. In reliance on the foregoing provision and any applicable “TOD” or “Transfer on Death” statutes, it may be possible for the Member to provide for a testamentary disposition of his interest in the LLC without such transfer being subject to probate or treated as an invalid will substitute. An example of such a provision would read as follows: “In the event of the death of the Member, the Company shall not dissolve but the spouse of the Member shall automatically and without any further action be admitted as a substitute Member and be vested personally with all of the rights and benefits of membership in the Company including the limited liability company interest. For the avoidance of doubt, the foregoing is intended to be a “Transfer on Death” designation in favor of the spouse of the Member and is intended to comply with all “TOD” registration requirements within the meaning of any applicable statute.” The practitioner should note, however, that the effectiveness of any such provision to transfer the interest in an LLC upon the death of the sole member may be subject to the testamentary laws in various jurisdictions, including the jurisdiction in which the sole member is domiciled. Therefore, all applicable laws should be consulted before such a provision is utilized. 7 Comment: Section 18-803 of the Delaware Act provides for the winding up of an LLC upon its dissolution setting forth, among other things, who conducts the winding up and certain specified powers of the persons conducting such activity. Section 18-804 of the Delaware Act specifies the priority of the distribution of assets in the winding up of an LLC. Generally, this requires distributions to be made first to creditors, then to members in satisfaction of liabilities for distributions and thereafter to members first for the return of their contributions and second respecting their limited liability company interests. 8 9. Additional Contributions. The Member may but is not required to make any additional capital contribution to the Company.8 10. Allocation of Profits and Losses; Tax Status. The Company’s profits and losses shall be allocated to the Member. At all times that the Company has only one member (who owns 100% of the limited liability company interests in the Company), it is the intention of the Member that the Company be disregarded for federal, state, local and foreign income tax purposes. 11. Personal Services. The Member shall not be required to perform services for the Company solely by virtue of being a member. However, in consideration of the Member managing the affairs of the Company, the Company shall pay to the Member a salary in the amount of _______ per year payable in equal monthly installments.9 The Company may modify 8 As noted in the second Comment in each of footnotes 4 and 5, practitioners preparing single member LLC agreements and clients using single member LLCs must take care to avoid veil-piercing -- a risk to which single member LLCs may, in some cases, be substantially more susceptible than multi-member LLCs. In a veil-piercing claim against the member of a single member LLC, a plaintiff may claim that since, in practice, the owners of small single-owner businesses (especially those owned by individuals as opposed to entities) often view all of their personal assets as being available to ensure their business success, the court should view all of the assets of the member of a single member LLC as being at risk in the claim in question. Naturally, the member of a single member LLC should carefully segregate its personal assets from those belonging to the LLC. In addition, if the operating agreement specifically documents the amount of the member’s contributions and provides that no contribution shall be deemed to have been made to the LLC and no asset of the member shall be deemed to be at risk for claims against the LLC unless expressly documented as a contribution in the operating agreement, this may help to counter the above argument by a creditor. Comment: Section 18-607 of the Delaware Act provides, in effect, that an LLC shall not make a distribution to a member to the extent that the distribution renders the LLC insolvent on an asset basis. A member who receives a distribution knowing that it is in violation of Section 18-607 is liable to the LLC for the amount of the distribution. Theoretically, in the event of the bankruptcy of the LLC, the LLC’s creditors will stand in its shoes and have an action against the member. However, Section 18-107 of the Delaware Act allows a member or manager generally to transact business with an LLC; presumably, the member or manager can enter into a contract to provide services for an LLC, including a single member LLC. In such a case, the LLC could pay the member or manager compensation for the services, so long as the compensation was fair and reasonable. Since the compensation payments would be in the nature of a separate contract with the member or manager, they should not constitute “distributions” subject to the limitations of Section 18-607. Thus, a member of an LLC that is insolvent but which requires significant services could render those services and receive reasonable compensation without fear that he or she would be forced to disgorge those payments if the LLC were subsequently forced to liquidate. (continued . . .) 9 9 this section to change amounts to be paid to the Member or the manner in which the payments are to be made; however, no modification shall be made retroactively. Payments made pursuant to this Section 11 shall not constitute distributions for purposes of the Delaware Act. 12. Distributions. In addition to the salary paid to the Member pursuant to Section 11, distributions shall be made to the Member at the times and in the amounts determined by the Managing Member, provided that no distribution shall be made in violation of the Delaware Act and no distribution shall be made to the Member in connection with the resignation of the Member in the event the Member is adjudged incompetent to manage his person or property by a court of competent jurisdiction and, unless otherwise determined by the Member, no distribution will be paid to the Member upon his withdrawal in connection with the voluntary assignment of his entire interest pursuant to Section 13 hereof.10 (. . . continued) As drafted, Section 11 only refers to the Member “managing the affairs of the Company.” It is usually preferable, however, to outline the nature of the services to be performed in greater detail -- ideally in as much detail as would be contained in an employment agreement. Alternatively, the practitioner could modify Section 11 to refer to a separate “services rider” attached as an exhibit. This exhibit would be modeled after an employment agreement and contain provisions detailing the services to be rendered, benefits, and other material terms of employment. To the extent that a specific monthly payment is called for in the LLC Agreement, or other specific terms are included, care should be taken to ensure that the requisite payments are made and the terms complied with to avoid an increased risk of piercing the LLC veil. 10 Comment: The limitations imposed by Section 18-607 are noted in the first Comment in footnote 9. Section 18-607 applies to all distributions other than those made upon the winding up of an LLC which are governed by Section 18-804. The practitioner should also note that under Section 18-604, upon resignation, a resigning member is entitled to any distribution provided under the LLC Agreement and, if the LLC Agreement does not so provide, then a resigning member is entitled to receive, within a reasonable time after resignation, the fair value of such Member’s limited liability company interest as of the date of resignation based upon such Member’s right to share in distributions from the LLC. Because, as noted in the Comment in footnote 12, it is assumed that in a voluntary assignment consideration will be payable by the assignee to the assignor, Section 12 of this Agreement has been written to negate the effect of Section 18-604 of the Delaware Act upon resignation of the Member in connection with such an assignment. Similarly, the effect of Section 18-604 is negated in connection with the deemed resignation of the Member in the event he is adjudicated incompetent based on the assumption that in such an event it will best preserve the value of the Company if all assets remain within the Company and it is continued by the Member’s personal representative pursuant to Section 7 of this Agreement. 10 13. Assignments. The Member may transfer or assign (including as a collateral assignment or pledge) in whole or in part its limited liability company interest.11 In connection with a voluntary transfer or assignment by the Member of its entire limited liability company interest in the Company (not including a collateral assignment or pledge), the Member will automatically withdraw and the assignee will automatically and simultaneously be admitted as the successor Member without any further action at the time such voluntary transfer or assignment becomes effective under applicable law and the Company shall be continued without dissolution.12 In connection with a partial assignment or transfer by the Member of its limited liability company interest in the Company, this Agreement shall be amended to reflect the fact that the Company 11 Comment: To facilitate a pledge of the interests in the Company in connection with a financing, it may be desirable to include a provision opting into coverage of Revised Article 8 of the Uniform Commercial Code (“UCC”). In connection with such a provision, the Agreement should also specify that the interests in the LLC will constitute certificated or uncertificated securities. In the absence of such a provision opting into coverage under Revised Article 8 of the UCC, the interests in a single member LLC will generally be deemed to be general intangibles under the UCC (although that characterization may differ from jurisdiction to jurisdiction). Comment: In connection with the pledge of the interests in an LLC, the practitioner should consider whether a lender foreclosing on such pledge has the right to become the substitute member of the LLC or will simply be an assignee of a limited liability company interest. If the foreclosing lender is only an assignee, it will generally have no right to cause the LLC to make distributions or take other actions that may benefit its position. On the other hand, when a lender forecloses on an LLC interest and becomes the member of the LLC, it may assume liability, as the owner and operator of the LLC, for the LLC’s activities -- past and present. 12 Comment: Although LLC agreements will often have a requirement that they be executed by any successor member, such a formality, if not complied with upon a full assignment, may give rise to an unintended dissolution of the LLC if the successor is not admitted due to an inadvertent failure to sign the LLC Agreement. Thus, Section 13 has been drafted to provide that in connection with a voluntary assignment of all of the Member’s interest the assignee will automatically be admitted as the successor member. The triggering event is the effectiveness of the assignment under applicable law. Thus, if a purported assignment were not accepted, the assignment would not become effective so the assignee will never become the successor member. Since it is assumed that in connection with such a voluntary assignment, any consideration will be payable by the assignee to the assignor, Section 12 of this Agreement provides that, unless otherwise determined by the Member, the assignor Member will not be entitled to a resigning distribution in connection with such a voluntary assignment, which would otherwise be the case under Section 18-604 of the Delaware Act as described in the second Comment to footnote 10 above. 11 will have more than one member or one member and one or more economic interest holding assignees.13 14. Resignation. The Member may resign from the Company at such time as he or she shall determine; provided that the Member shall be deemed to have resigned from the Company at such time as he shall be adjudged by a court of competent jurisdiction to be incompetent to manage his person or property.14 Neither the filing of a voluntary petition in bankruptcy nor any 13 Comment: Sections 13 and 15 contemplate that in connection with the admission of an additional member or a transfer resulting in there being one member and one or more economic interest holding assignees, the Agreement will be amended to reflect both the relative rights and duties of the new members and/or economic interest holding assignees and, significantly, the fact that the Company would no longer be disregarded as an entity separate from its owner for federal tax purposes. It should be noted, however, that the form does not take the approach of either voiding any transfer that would cause the Company not to be disregarded as an entity separate from its owner for federal tax purposes or voiding any transfer that would have that effect without a concurrent amendment to the Agreement to reflect the new status of the Company. Rather, the form assumes that proper amendments to the Agreement will be made and that in the event they are not made, it would still be preferable to give effect to the transfers rather than voiding them ab initio. However, there may be transactions where the consequence of an inadvertent or other transfer that causes the Company to not be disregarded as an entity separate from its owner for federal tax purposes are so severe that the practitioner should consider including a provision that any such transfer would be void ab initio, at least if it is not done with the specific intention that the Company would have a different tax status for federal tax purposes. Comment: Pursuant to Section 18-603 of the Delaware Act, a member may only resign from an LLC at the time or upon the happening of the events specified in the LLC agreement, and, unless otherwise provided in the LLC agreement, a member may not resign from an LLC prior to the dissolution and winding up of the LLC. Thus, Section 13 provides that the Member may resign from the Company at such time as he or she shall determine and also provides that the Member shall be deemed to have resigned in the event of his incompetency. The deemed resignation by the Member upon his incompetency ties in to the automatic admission of the Member’s personal representative upon such an event pursuant to Section 7 of this Agreement which provides for the continuation of the Company by the personal representative. Although pursuant to Section 18-705 of the Delaware Act, a personal representative of a Member who is adjudged incompetent is vested with a right to exercise such Member’s rights for the purpose of administering the Member’s property, the mechanic in Section 7 of this Agreement providing for the admission as a successor member of the personal representative or its designee has been used as the most direct way to provide for the continuation of the Company and the succession of membership in the event of the incompetency of the sole Member. (continued . . .) 12 14 other event specified in Section 18-304 of the Delaware Act will cause the Member to cease to be a member of the Company. 15. Admission of Additional Members. One or more additional members of the Company may be admitted to the Company with the consent of the Member. Prior to the admission of any such additional member of the Company (including an admission in connection with a partial assignment or transfer pursuant to Section 13), this Agreement shall be amended by the Member and the person or persons to be admitted as additional members to make such changes as they shall determine to reflect the fact that the Company shall have more than one member. 16. Liability of Member. The Member shall not have any liability for the obligations or liabilities of the Company except to the extent provided in the Delaware Act. 17. Exculpation and Indemnification. 17.1 Exculpation.15 (i) The Member, whether acting as Member, in its capacity as Managing Member, or in any other capacity, shall, to the fullest extent permitted by law, have no liability to the Company or to any other person for any loss, damage or claim incurred by reason of any act or omission (whether or not constituting negligence or gross negligence) performed or omitted by the Member. (ii) The Member shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any person or entity as to matters the Member reasonably believes are within (. . . continued) The practitioner should also note Section 12 of this Agreement (together with the second Comment accompanying footnote 10) which has been drafted to avoid the distribution requirement of Section 18-604 upon the resignation of the Member (i) in the event of a voluntary assignment in full of his limited liability company interest or (ii) in the event of his incompetency. Finally, the last sentence of Section 14 is included to override the deemed cessation of membership of a member under Section 18-304 of the Delaware Act who files for bankruptcy or is otherwise involved in a specified bankruptcy event. 15 Comment: The exculpation and indemnification provisions set forth in Section 17 provide broad exculpation and broad, mandatory indemnification for the Member irrespective of the capacity in which he or she is acting and whether or not he or she has ceased to be the Member of the Company. These provisions also provide that the Member may, at its sole discretion, grant indemnification to other persons. The practitioner should carefully consider the standard for exculpation and indemnification for the Member as well as any other persons to be covered and whether such indemnification should be mandatory or at the discretion of the Member. 13 the professional or expert competence of such person or entity and who or which has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which distributions to the Member might properly be paid. The foregoing provision shall in no way be deemed to reduce the limitation on liability of the Member provided in Clause (i) of this Section 17.1. (iii) All provisions of this Section 17 shall apply to any former member of the Company for all actions or omissions taken while such person was the Member of the Company to the same extent as if such person were still the Member of the Company. 17.2 Duties and Liabilities of the Member. (i) To the extent that, at law or in equity, the Member has duties (including fiduciary duties) and liabilities relating thereto to the Company or to any other person, the Member acting under this Agreement shall not be liable to the Company or to any other person for its reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of the Member otherwise existing at law or in equity, are agreed to replace such other duties and liabilities of such Member. (ii) Whenever in this Agreement the Member is permitted or required to make a decision (a) in his “discretion” or under a grant of similar authority or latitude, the Member shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Company or any other Person, or (b) in its “good faith” or under another express standard, the Member shall act under such express standard and shall not be subject to any other or different standard imposed by this Agreement or other applicable law. 17.3 Indemnification. To the fullest extent permitted by applicable law, the Member (irrespective of the capacity in which it acts) shall be entitled to indemnification from the Company for any loss, damage or claim incurred by the Member by reason of any act or omission (whether or not constituting negligence or gross negligence)16 performed or omitted by him on behalf of the Company; provided, however, that any indemnity under this Section 16 shall be provided out of and to the extent of Company assets only, and neither the Member nor any other person shall have any personal liability on account thereof. 17.4 Expenses. To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by the Member in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding. 17.5 Insurance. The Company may purchase and maintain insurance, to the extent and in such amounts as the Managing Member shall, in its sole discretion, deem reasonable, on 16 Comment: To indemnify a person for his own negligence, Delaware law requires that intention to be specifically stated. 14 behalf of Covered Persons and such other persons or entities as the Managing Member shall determine, against any liability that may be asserted against or expenses that may be incurred by any such person or entity in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such person or entity against such liability under the provisions of this Agreement. 17.6 Other. The Managing Member and the Company may enter into indemnity contracts with any other persons granting such persons rights of indemnification and may adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under this Section 17 and containing such other procedures regarding indemnification all as the Managing Member determines in his sole discretion. 18. Outside Business. The Member or any Affiliate thereof may engage in or possess an interest in any business venture of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Member shall have no rights by virtue of this Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Company, shall not be deemed wrongful or improper. The Member or any Affiliate thereof shall not be obligated to present any particular investment opportunity to the Company even if such opportunity is of a character that, if presented to the Company, could be taken by the Company, and the Member or Affiliate thereof shall have the right to take for its own account (individually or as a partner, shareholder, fiduciary or otherwise) or to recommend to others any such particular investment opportunity. 19. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Member.17 20. Governing Law. This Agreement shall be governed by, and construed under, the laws of the State of Delaware, without regard to the rules of conflict of laws thereof or of any other jurisdiction that would call for the application of the substantive laws of a jurisdiction other than the State of Delaware. 21. Miscellaneous. Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. All references to “Sections” and “Clauses” shall refer to corresponding provisions of this Agreement. The use of the word “including” or any similar term shall be deemed to mean “including, without limitation.” Any reference in this Agreement to any law, rule or regulation shall be construed as reference to such law, rule or regulation as the same may have been, or may from time to time be, amended, revised or reenacted and any successor thereto. The headings of 17 Comment: Although under Delaware law written agreements may be amended or modified by a course of dealing notwithstanding a provision that authorizes amendment only by written instrument, the better practice is to provide for written amendments so that the exact terms of the current LLC agreement are always readily accessible to the Member. 15 sections in this Agreement are intended for reference purposes only and shall be given no substantive meaning or any interpretive force. IN WITNESS WHEREOF, the undersigned has duly executed this Limited Liability Company Agreement as of the day and year first aforesaid. [MEMBER] The Company hereby executes this Agreement for the purposes of becoming a party hereto and agreeing to perform its obligations and duties hereunder and being entitled to enjoy its rights and benefits hereunder.18 [THE COMPANY] By: Name: Title: 139881 18 Since an LLC may have obligations to perform under its LLC Agreement, many practitioners will make the LLC a party to its LLC Agreement or will provide for a form of joinder, as provided above. The Delaware Supreme Court in Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999), held that even though an LLC had not executed its limited liability company agreement, the LLC was nevertheless bound by an arbitration and form selection clause in the LLC Agreement. The Court recognized that the LLC had not signed the LLC Agreement. However, it stated that the members were the real parties in interest and that the LLC was simply their joint business vehicle and, therefore, it would enforce the clause against the LLC. It should be noted that at least one other jurisdiction has reached a contrary result in a case that also considered the enforceability of an arbitration clause against an LLC that was not a party to its LLC Agreement. See Bubbles & Bleach, LLC v. Becker, No. 97C 1320 (N.D. Ill. 1977) (U.S. Dist. LEXIS 7471) (applying Wisconsin law). Thus, in jurisdictions other than Delaware, if the parties to an LLC Agreement wish to make it enforceable against the LLC itself, they should provide that the LLC is contractually bound to the terms of the LLC Agreement and, even in Delaware, this would be a prudent course of action to ensure that the LLC Agreement is enforceable against the LLC in all circumstances. 16