1. law, govt and politics

LLC Operating Agreement
Mark D. Anderson
Coman & Anderson, P.C.
Lisle, IL
This chapter is reprinted from Limited Liability Corporations vs. S Corporations (2005
Ed.), a one-volume practice handbook published by Illinois Institute for Continuing Legal
Education (IICLE). For more information on how to purchase this handbook or to obtain
access to these volumes and other handbooks online through SmartBooks®, see
www.iicle.com or call Customer Service at
(800) 252-8062.
©Copyright 2006 by Mark D. Anderson. All rights reserved.
Section 2
I. [1.1] GENERAL DESCRIPTION AND FUNCTION
The operating agreement is the principal governing document of a limited liability company
(LLC). Although the filing of the articles of organization with the Secretary of State legally
creates an LLC in Illinois, the articles of organization will typically be skeletal in nature, similar
to the articles of incorporation of a corporation or the certificate of limited partnership of a
limited partnership. The agreement of the members (and managers, if any) relating to the internal
governance of the LLC, along with the agreement among the members regarding their business
relationship, is contained in the operating agreement. The operating agreement is a private
agreement and is not filed with the Secretary of State’s office.
The purpose and content of the operating agreement are discussed in §15-5(a) of the Limited
Liability Company Act, 805 ILCS 180/1-1, et seq., which states as follows:
All members of a limited liability company may enter into an operating
agreement to regulate the affairs of the company and the conduct of its business and
to govern relations among the members, managers, and company. To the extent the
operating agreement does not otherwise provide, this Act governs relations among
the members, managers, and company. Except as provided in subsection (b) of this
Section, an operating agreement may modify any provision or provisions of this Act
governing relations among the members, managers, and company.
II. [1.2] COMPARISON
TO
PARTNERSHIP
CORPORATE BYLAWS
AGREEMENTS
AND
The provisions of the Limited Liability Company Act concerning governance of a limited
liability company are, with the exception of the provisions contained in §15-5(b) of the Act (see
§2.3 below), default provisions applicable in the event that the members fail to adopt an operating
agreement or fail to address in an operating agreement any particular issue addressed in the Act.
Thus, the Limited Liability Company Act allows the members of an LLC to establish by contract
the vast majority of the provisions of their agreement and is therefore analogous in its
organizational principals to (a) the Uniform Partnership Act, 805 ILCS 205/1, et seq., §18 of
which grants partners, “subject to any agreement between them,” equal shares of profits and
losses and equal rights in the management and conduct of partnership business; (b) the Uniform
Partnership Act (1997), 805 ILCS 206/100, et seq., §103 of which provides, except for nine listed
exceptions, that “relations among the partners and between the partners and the partnership are
governed by the partnership agreement”; (c) the Revised Uniform Limited Partnership Act, 810
ILCS 210/100, et seq., §403 of which provides that general partners of limited partnerships,
except as provided in the Act “or in the partnership agreement,” have the rights and powers and
are subject to the restrictions of a partner in a partnership without limited partners; and (d) the
Uniform Limited Partnership Act (2001), 805 ILCS 215/0.01, et seq., §110 of which provides,
except for 12 listed exceptions, that “the partnership agreement governs relations among the
partners and between the partners and the partnership.” Consequently, a typical operating
agreement is similar in concept to a typical partnership agreement and, like a typical partnership
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agreement, will address in detail issues of management, voting, control, capitalization,
distributions, profit and loss allocations, transferability of interests, admission and withdrawal of
members, and dissolution.
In contrast, the Business Corporation Act of 1983, 805 ILCS 5/1.01, et seq., offers less
flexibility and includes more mandatory provisions, thereby limiting the ability or the need to
include in corporate bylaws provisions commonly found in partnership agreements and operating
agreements. Many corporations deal with some of the issues covered in a typical operating
agreement in ancillary agreements of the type generally called “shareholder agreements.”
III. [1.3] MANDATORY PROVISIONS
Section 15-5(b) of the Limited Liability Company Act lists seven provisions of the Act that
may not be changed by an operating agreement:
The operating agreement may not:
(1) unreasonably restrict a right to information or access to records under
Section 10-15;
(2) vary the right to expel a member in an event specified in subdivision (6) of
Section 35-45;
(3) vary the requirement to wind up the limited liability company’s business in
a case specified in subdivisions (3) or (4) of Section 35-1;
(4) restrict the rights of a person, other than a manager, member, or
transferee of a member’s distributional interest, under this Act;
(5) restrict the power of a member to dissociate under Section 35-50, although
an operating agreement may determine whether a dissociation is wrongful under
Section 35-50, and it may eliminate or vary the obligation of the limited liability
company to purchase the dissociated member’s distributional interest under Section
35-60;
(6)
eliminate or reduce a member’s fiduciary duties, but may:
(A) identify specific types or categories of activities that do not violate these
duties, if not manifestly unreasonable; and
(B) specify the number or percentage of members or disinterested
managers that may authorize or ratify, after full disclosure of all material facts,
a specific act or transaction that otherwise would violate these duties; or
(7) eliminate or reduce the obligation of good faith and fair dealing under
subsection (d) of Section 15-3, but the operating agreement may determine the
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standards by which the performance of the obligation is to be measured, if the
standards are not manifestly unreasonable.
As a review of §15-5(b) indicates, the term “mandatory” is, with regard to several of the
subsections, somewhat misleading. While removing absolute discretion, the provision still
permits the drafter of an operating agreement to tailor the terms of the operating agreement
concerning the provision of information and access to records, the consequences of dissociation,
and the boundaries of a member’s fiduciary duty and duty of good faith and fair dealing.
IV. [1.4] DEFAULT RULES
The operating agreement of a limited liability company should be in writing and address
comprehensively the internal governance and the business arrangements among the parties. In the
event, however, that certain aspects of the business and affairs of the LLC are not agreed to either
orally or in writing, the Limited Liability Company Act makes certain decisions for the parties by
providing default rules that are operative only if the parties do not agree otherwise. These default
rules appear throughout the Act. Sections 2.5 – 2.21 below discuss the default rules generally in
the order in which they appear in the Act.
Obviously, all of the issues in which default rules are provided in the Act are issues that the
members (and, if applicable, the managers) should discuss before beginning the business as the
default rules may not represent the intention of the parties. All of the default rules allow the
parties to set forth their own agreement either in the articles of organization or in the operating
agreement. To provide confidentiality and to simplify amendment, it is expected that most clients
will prefer to set forth their arrangements in the operating agreement.
A. [1.5] Admission of New Members
Section 10-1 of the Limited Liability Company Act describes the procedures for the
admission of new members to a limited liability company following the filing of the articles of
organization. Section 10-1 covers both the acquisition of a membership interest from the LLC
directly as well as the acquisition by assignment of an existing membership interest. The default
rule requires the unanimous consent of the members to permit a transferee to be admitted as a
new or substituted member with full management participation rights. Absent this consent (or
consent as required under the operating agreement), a transferee is deemed to hold only the
distributional interest of the transferor and has extremely limited rights to participate in the
business of the LLC. See 805 ILCS 180/30-10(a), 180/30-10(e).
In an LLC with many members, the default rule becomes unworkable since it gives every
member a veto right over the admission of new members. A more realistic option is for the parties
to agree that the approval of the managers, a designated percentage of the members, or a
combination of manager and a designated percentage of the members be obtained in order for a
new member to be admitted.
B. [1.6] Right to Information
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Section 10-15(a) of the Limited Liability Company Act requires a limited liability company
to provide members and their agents and attorneys access to its records, including the records
required to be kept by the LLC under §1-40 of the Act, at the LLC’s principal place of business or
other reasonable locations specified in the operating agreement. A similar right is granted under
§10-15(a) to former members for inspecting records concerning the period during which they
were members. The right of access includes the right to inspect and copy records during normal
business hours. The LLC is permitted to impose a reasonable charge, limited to the costs of labor
and material, for copies of records furnished. Id. A member has the right to obtain on demand, at
the LLC’s expense, a copy of the operating agreement. 805 ILCS 180/10-15(b).
The provisions of §10-15 are subject to the mandatory provisions of §15-5(b) of the Act and
may not be “unreasonably” restricted by the operating agreement. Whether a restriction is
reasonable is ultimately an issue for resolution by the courts. However, restrictions an LLC might
consider including in its operating agreement include requiring that a request be in writing and
specify with particularity the information or records requested. The operating agreement might
also permit the LLC, if it finds a request unduly burdensome, to make the information and records
available to the requesting member rather than undertaking to copy and deliver the information or
records to the member.
C. [1.7] Management
The Limited Liability Company Act requires that a limited liability company be either
member-managed or manager-managed and that this decision be stated in the articles of
organization. 805 ILCS 180/5-5(a)(4), 180/5-5(a)(5). The default rules concerning the
management of both member-managed and manager-managed LLCs are set forth in §15-1 of the
Act.
Section 15-1(a) provides that in a member-managed LLC, each member has equal rights in
the management and conduct of the company’s business and, except for matters listed in §151(c), any matter relating to the business of the LLC may be decided by a majority of the
members. For a manager-managed LLC, §15-1(b) provides that each manager has equal rights in
the management and conduct of the company’s business and, except for matters listed in §151(c), any matter relating to the business of the LLC may be decided by a majority of the
managers. In addition, each manager must be designated, appointed, elected, removed, or
replaced by a vote, approval, or consent of the majority of the members and holds office until a
successor has been elected and qualified unless the manager sooner resigns or is removed. 805
ILCS 180/15-1(b)(3).
Section 15-1(c) provides that for both member-managed and manager-managed LLCs, the
following matters require the unanimous approval of the members:
(1)
the amendment of the operating agreement under Section 15-5;
(2)
an amendment to the articles of organization under Article 5;
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(3)
the compromise of an obligation to make a contribution under Section 20-
5;
(4) the compromise, as among members, of an obligation of a member to make
a contribution or return money or other property paid or distributed in violation of
this Act;
(5) the making of interim distributions under subsection (a) of Section 25-1,
including the redemption of an interest;
(6)
the admission of a new member;
(7) the use of the company’s property to redeem an interest subject to a
charging order;
(8) the consent to dissolve the company under subdivision (2) of subsection (a)
of Section 35-1;
(9) a waiver of the right to have the company’s business wound up and the
company terminated under Section 35-3;
(10)
and
the consent of members to merge with another entity under Section 37-20;
(11) the sale, lease, exchange, or other disposal of all, or substantially all, of the
company’s property with or without goodwill.
Similarly, for a manager-managed LLC having more than one manager, the operating
agreement may require unanimity among the managers or the consent of a certain percentage of
the managers to authorize company action. Yet another model for management of a managermanaged LLC is adoption of a corporate structure through the creation of a “board of managers”
having duties and responsibilities similar to those of a corporate board of directors and providing
for the election by the board of managers of officers who are given authority within the operating
agreement or by resolution of the board of managers to operate the company on a day-to-day
basis.
As noted in §2.5 above, in any LLC having many members, any default rule requiring the
unanimous consent of the members becomes unworkable because it gives every member a veto
right over any affected decision. In most cases, the operating agreement for LLCs having many
members will reduce the percentage of members required to consent to the issues for which
unanimous consent is required under §15-1(c). The percentage may vary by agreement and by
issue.
In the event that the default rules concerning the authority of any member or manager to bind
the LLC are varied by the operating agreement, consideration should also be given to including
provisions concerning authority in the articles of organization. Pursuant to §13-5(a) of the
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Limited Liability Company Act, in a member-managed LLC, an act of any member in the
ordinary course of the company’s business binds the LLC unless the member had no authority to
act for the LLC in the particular matter and the person with whom the member was dealing knew
or had notice that the member lacked authority. Section 13-5(b) provides a similar standard for
the actions of each manager in a manager-managed LLC. By including limitations on the
authority of a member or manager in the articles of organization, an LLC may be able to avoid an
unauthorized action of a member or manager. Similarly, unless the articles of organization limit
their authority, §13-5(c) permits any manager of a manager-managed LLC or any member of a
member-managed LLC to execute and deliver any instrument transferring or affecting the
company’s interest in real property.
D. [1.8] Standards of Member’s and Manager’s Conduct
Section 15-3 of the Limited Liability Company Act establishes the fiduciary duties of a
member in a member-managed limited liability company and a manager in a manager-managed
limited liability company. For members of a member-managed LLC, §15-3(b) (made applicable
to managers of a manager-managed LLC by §15-3(g)(2)) provides that the duty of loyalty to the
company and other members includes the following duties:
(1) to account to the company and to hold as trustee for it any property, profit,
or benefit derived by the member in the conduct or winding up of the company’s
business or derived from a use by the member of the company’s property, including
appropriation of a company’s opportunity;
(2) to act fairly when a member deals with the company in the conduct or
winding up of the company’s business as or on behalf of a party having an interest
adverse to the company; and
(3) to refrain from competing with the company in the conduct of the
company’s business before the dissolution of the company.
Section 15-3(c) provides that the duty of care for members in the winding up of the business of a
member-managed LLC “is limited to refraining from engaging in grossly negligent or reckless
conduct, intentional misconduct, or a knowing violation of law.” Section 15-3(d) requires a
member of a member-managed LLC to discharge his or her duties to the company and the other
members and exercise any rights in a manner consistent with the obligation of good faith and fair
dealing. In each case, these obligations are made applicable to managers of a manager-managed
LLC by §15-3(g)(2).
Section 15-5(b)(6) prohibits the elimination or reduction of the duty of loyalty or the duty of
care in the operating agreement, but permits the operating agreement to
(A) identify specific types or categories of activities that do not violate these
duties, if not manifestly unreasonable; and
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(B) specify the number or percentage of members or disinterested managers
that may authorize or ratify, after full disclosure of all material facts, a specific act
or transaction that otherwise would violate these duties.
In cases in which there is a sole manager, authority or ratification would have to involve
disclosure to and consent by some or all of the members. This area should be addressed in the
operating agreement with specificity if it is contemplated that the manager may be providing
services for compensation to the LLC that may (or may not) be considered to be in the conduct of
the company’s business.
E. [1.9] Member’s and Manager’s Rights to Payments and Reimbursement
Section 15-7(a) of the Limited Liability Company Act provides that a limited liability
company shall reimburse a member or manager for payments made and indemnify a member or
manager for liabilities incurred by the member or manager in the ordinary course of the business
of the company or for the preservation of the company’s business or property. Similarly, §15-7(b)
provides that a member shall be reimbursed by the LLC for any advance made by the member to
the LLC in excess of the contribution the member has agreed to make. Pursuant to §15-7(c), any
obligation of the LLC under §15-7(a) or §15-7(b) constitutes a loan to the LLC on which interest
accrues from the date of the payment or advance. Finally, §15-7(d) provides that a member is not
entitled to remuneration for services provided to the LLC, except for reasonable compensation for
services rendered in winding up the company.
Operating agreements commonly have indemnification provisions substantially more
complex than that provided under §15-7(a), addressing and conditioning indemnification on the
nature of the conduct (i.e., whether the conduct for which indemnification is sought was within
the member’s or manager’s authority or was negligent, grossly negligent, or reckless or
constituted intentional misconduct). In addition, indemnification provisions often directly address
whether the LLC will defend the member or manager in any litigation arising from the conduct
or, alternatively, will reimburse the member or manager for the member’s or manager’s cost of
defense, either concurrently with the incurrence of these expenses or after the litigation is
resolved.
The default rule in §15-7 that is most likely to vary from company to company is the
provision in §15-7(d) concerning remuneration of members for services to a company.
F. [1.10] Actions by Members
Section 15-20(a) of the Limited Liability Company Act provides that a member may maintain
an action against a limited liability company or another member for legal or equitable relief, with
or without an accounting as to the company’s business, (1) to enforce the member’s rights under
the operating agreement, (2) to enforce the member’s rights under the Act, or (3) to enforce the
member’s rights and otherwise to protect the interests of the member, including rights and
interests arising independently of the member’s relationship with the company.
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Taking §15-5(b) of the Act literally, one would conclude that the members are free to
eliminate these rights in their operating agreement. Such a choice, as unlikely as it may be, would
probably be deemed void as against public policy. However, members probably would be
permitted, and should consider, the possibility of requiring members to submit claims to
mediation or arbitration.
G. [1.11] Member’s Liability for Contributions
Section 20-5(c) of the Limited Liability Company Act provides that a member’s obligation to
contribute money, property, or other benefit to or perform services for a limited liability company
is not excused by the member’s death, disability, or other inability to perform personally. In
addition, if a member does not make a required contribution of property or services, the member
is obligated at the option of the LLC to contribute money equal to the value of the portion of the
required contribution that has not been made. Id. This possibility increases the importance of
reciting the agreed value of property or services that function as capital contributions.
The member’s obligations to make contributions to the LLC should in all cases be addressed
in the operating agreement, including not only any obligation to make contributions upon the
formation of the LLC, but any requirement to fund contributions during the life of the company.
Section 20-5(d) of the Act permits a creditor of the LLC who extends credit or otherwise acts
in reliance on an obligation described in §20-5(c), without notice of any compromise of that
obligation made in accordance with §15-1(c)(4) of the Act (presumably as the unanimity
requirement of this section may have been varied by the operating agreement), to enforce the
original obligation. Pursuant to §15-5(b)(4) of the Act, this right may not changed by the
operating agreement.
H. [1.12] Sharing of Profits and Losses
A critical financial decision to be made by the members of a limited liability company before
commencing to do business is the allocation of profits and losses. The members have a great deal
of latitude in making decisions in this area. This is even more true since the amendments of P.A.
90-424 (eff. Jan. 1, 1998) removed all references to profits and losses from the Limited Liability
Company Act, thereby removing any apparent default rule for profits and losses. This is the same
rule that has been adopted by the Model Uniform Limited Liability Company Act of the National
Conference of Commissioners on Uniform State Laws. As strange as it may initially seem, there
is no legal reason to have a statutory default rule for the determination or allocation of profits and
losses. This allocation is generally based on the manner in which capital contributions, financing
obligations, and rights to distributions impact the risk of loss and the actual profit sharing of the
members. This does not mean that arguments cannot and will not arise among the members in
determining the allocation of profits and losses an LLC, so it is still important to include these
provisions in any operating agreement.
For purposes of state law, sharing of losses can be an element in determining the liability of a
general partner, for example, to partnership creditors. In an LLC, however, no member is liable
under the Limited Liability Company Act to creditors of the LLC. Therefore, the drafters
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concluded there was no need for a default rule regarding losses. There is also a separate default
rule for distributions from the LLC that is not based on profits and losses (but on a per capita
basis), so there is no need to use profits (or losses) in the Act. See the discussion of 805 ILCS
180/25-1(a) in §2.13 below.
I.
[1.13] Sharing of Distributions
Section 25-1(a) of the Limited Liability Company Act provides, as a default rule, for
distributions to be made in equal shares among the members. This will rarely reflect the
members’ desire in this regard but is much easier to administer as a default rule than a rule based
on relative book value or capital contributions. This is especially true when contributions may be
made in services, and even future services. An equal share default rule also reduces the
significance of distinctions for this purpose between loans by a member and capital contributions.
Regardless of how easy it may be to administer, a default rule for distributions, which arguably is
the heart of any business transaction, is generally not to be relied on. It is important that rules for
distributions are clearly set forth and be coordinated with the other economic provisions of the
operating agreement, particularly the provisions for the sharing of profits and losses and the
making of capital contributions.
J. [1.14] Timing of Interim Distributions
The articles of organization or the operating agreement can set forth the times or the events
that would trigger distributions to the members. However, absent such a provision, under the
provisions of §15-1(c)(5) of the Limited Liability Company Act, a member is entitled to receive
interim distributions (i.e., any distribution before winding up) only with the unanimous consent of
all the members, even in a manager-managed limited liability company. Since it is rarely a good
idea to put oneself in the position of requiring unanimous consent for any provision, especially
one dealing with the day-to-day economics of an operating business, this becomes an important
subject on which the members need to agree and include in any operating agreement.
K. [1.15] Dissociation
The Limited Liability Company Act introduces a new concept: dissociation. The Act does not
explicitly define “dissociation,” but it does provide in §35-45 that a member is dissociated from a
limited liability company upon the occurrence of any of the following eleven events:
(1) The company’s having notice of the member’s express will to withdraw
upon the date of notice or on a later date specified by the member.
(2) An event agreed to in the operating agreement as causing the member’s
dissociation.
(3) Upon transfer of all of a member’s distributional interest, other than a
transfer for security purposes or a court order charging the member’s
distributional interest that has not been foreclosed.
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(4)
The member’s expulsion pursuant to the operating agreement.
(5)
The member’s expulsion by unanimous vote of the other members if:
(A) it is unlawful to carry on the company’s business with the member;
(B) there has been a transfer of substantially all of the member’s
distributional interest, other than a transfer for security purposes or a court
order charging the member’s distributional interest that has not been
foreclosed;
(C) within 90 days after the company notifies a corporate member that it
will be expelled because it has filed a certificate of dissolution or the equivalent,
its charter has been revoked, or its right to conduct business has been suspended
by the jurisdiction of its incorporation, the member fails to obtain a revocation
of the certificate of dissolution or a reinstatement of its charter or its right to
conduct business; or
(D) a partnership or a limited liability company that is a member has been
dissolved and its business is being wound up.
(6) On application by the company or another member, the member’s
expulsion by judicial determination because the member:
(A) engaged in wrongful conduct that adversely and materially affected the
company’s business;
(B) willfully or persistently committed a material breach of the operating
agreement or of a duty owed to the company or the other members under
Section 15-3; or
(C) engaged in conduct relating to the company’s business that makes it
not reasonably practicable to carry on the business with the member.
(7)
The member’s:
(A) becoming a debtor in bankruptcy;
(B) executing an assignment for the benefit of creditors;
(C) seeking, consenting to, or acquiescing in the appointment of a trustee,
receiver, or liquidator of the member or of all or substantially all of the
member’s property; or
(D) failing, within 90 days after the appointment, to have vacated or stayed
the appointment of a trustee, receiver, or liquidator of the member or of all or
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substantially all of the member’s property obtained without the member’s
consent or acquiescence, or failing within 90 days after the expiration of a stay
to have the appointment vacated.
(8)
In the case of a member who is an individual:
(A) the member’s death;
(B) the appointment of a guardian or general conservator for the member;
or
(C) a judicial determination that the member has otherwise become
incapable of performing the member’s duties under the operating agreement.
(9) In the case of a member that is a trust or is acting as a member by virtue of
being a trustee of a trust, distribution of the trust’s entire rights to receive
distributions from the company, but not merely by reason of the substitution of a
successor trustee.
(10) In the case of a member that is an estate or is acting as a member by virtue
of being a personal representative of an estate, distribution of the estate’s entire
rights to receive distributions from the company, but not merely the substitution of
a successor personal representative.
(11) Termination of the existence of a member if the member is not an
individual, estate, or trust other than a business trust.
The operating agreement may not eliminate the events of dissociation set out in §35-45(1) or
§35-45(6) above (i.e., voluntary withdrawal in a member-managed LLC (see discussion in §2.16
below) and judicial expulsion). 805 ILCS 180/15-5(b)(2), 180/15-5(b)(5). Other events of
dissociation may be varied or eliminated in the operating agreement. 805 ILCS 180/15-5(a).
While §§15-5 and 35-45(1), read together, indicate that the operating agreement may not
eliminate the right of a member to dissociate through a voluntary withdrawal process, §35-50(a),
as amended by P.A. 92-33 (eff. July 1, 2001), makes it clear that this limitation is restricted to
member-managed LLCs. A member in a manager-managed LLC may not dissociate unless the
operating agreement specifies in writing the time or the events upon the happening of which a
dissociation is permitted.
L. [1.16] Member’s Right To Withdraw Voluntarily; Effects of Dissociation
Prior to the passage of P.A. 92-33 in 2001, the right to withdraw voluntarily from a limited
liability company was more than simply a default rule. Section 35-50(a) of the Limited Liability
Company Act had provided that members had the power to withdraw from an LLC at any time by
providing notice of an express will to withdraw, and §15-5(b)(5) provided that this power to
withdraw could not be restricted in the operating agreement.
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P.A. 92-33 amended §35-50(a) to limit the absolute right to withdraw or dissociate to
member-managed LLCs. For manager-managed LLCs, §35-50(a) provides that, in the absence of
a provision in the operating agreement affirmatively granting members the right to dissociate (and
specifying the time or events upon the happening of which a member may associate), a member
does not have the power, rightfully or wrongfully, to dissociate from the LLC before the
dissolution and winding up of the company. P.A. 92-33 also amended §§35-50(b), 35-50(c), and
35-50(d), which address the concept of wrongful dissociation, to limit it to members who
dissociate from member-managed LLCs. Unless otherwise agreed to in writing by the members,
these amendments apply only to companies with original articles of organization that are filed and
effective after January 1, 2001. 805 ILCS 180/35-50(e).
These amendments may be a reflection of the different fiduciary duties members owe in
member-managed and manager-managed LLCs. See discussion in §2.8 above. In membermanaged LLCs, in which the members owe a variety of fiduciary duties to the company and each
other, it would be unfair to restrict their ability to withdraw or dissociate and thereby cut off these
duties. Because the member of a manager-managed LLC who is not also a manager does not owe
these same duties, the need for an absolute right to withdraw or dissociate is not as important.
The operating agreement can make voluntary withdrawal (and other types of dissociation)
less appealing. It may include express provisions making dissociation wrongful. 805 ILCS
180/15-5(b)(5), 180/35-50(b). Section 35-50(c) states that a member who wrongfully dissociates
is liable to the LLC and the other members for damages caused by the dissociation. If the
wrongful dissociation does not result in dissolution and a winding up, §§35-50(d) and 35-60(f)
require that any damages sustained by the LLC for the wrongful dissociation must be offset
against any distributions otherwise due the member after the dissociation. The operating
agreement may also eliminate or vary the obligation of the LLC to purchase the interest of a
dissociating member. 805 ILCS 180/15-5(b)(5). This probably means that while the agreement
may eliminate the LLC’s responsibility to promptly purchase the dissociating member’s
distributional interest, it could not eliminate or forfeit the distributional interest entirely.
M. [1.17]
Distributions Following Dissociation
Section 35-55(a) of the Limited Liability Company Act states the default rule that a limited
liability company must cause a member’s interest in distributions to be purchased upon
dissociation. As noted in §2.16 above, §15-5(b)(5) states that this default requirement may be
eliminated or varied in the LLC’s operating agreement.
N. [1.18] Form of Distributions
Section 25-1(b) of the Limited Liability Company Act provides the default rule that states
that a member has no right to receive, and may not be required to accept, a distribution in kind.
As with most of the other default rules, under §15-5(a), the parties can eliminate this prohibition
on in-kind distributions in the operating agreement. This can be an important item in a limited
liability company with valuable intellectual property or other unique assets.
2 - 12
O. [1.19] Transfer of Interest
Section 30-1(a) of the Limited Liability Company Act states that members are not co-owners
of, and have no transferable interest in, the property of the limited liability company. However, a
member’s interest in company distributions is personal property and may be transferred in whole
or in part. 805 ILCS 180/30-1(b). “Transfers” are defined broadly to include assignments,
conveyances, deeds, bills of sale, leases, mortgages, security interests, encumbrances, and gifts.
805 ILCS 180/1-5.
The default rule is that the transferee of a member’s interest in distributions is not entitled to
exercise any of the rights of a member, participate in the management or conduct of the
company’s business, require access to information concerning the company’s transactions, or
inspect or copy any of the company’s records. 805 ILCS 180/30-5, 180/30-10(d). Section 3010(a) states, however, that a transferee may become a member and obtain the rights and
obligations of a member if and to the extent that the transferor gives the transferee these rights in
accordance with authority described in the operating agreement or all other members consent. In
the absence of a provision in the operating agreement, the unanimous consent requirement, which
effectively operates to grant each member a veto right regarding new members, is probably
unworkable in most situations in which there are more than a few members. Regardless of
whether the transferee becomes a member, the transferor is not released from liability to the
company. 805 ILCS 180/30-10(c).
Section 30-10(b) states that a transferee member is not obligated for the transferor’s liabilities
to make contributions or return illegal distributions about which the transferee member does not
know at the time he or she becomes a member.
P. [1.20] Dissolution
Section 35-1 of the Limited Liability Company Act states that upon the occurrence of any of
the following events, the limited liability company is dissolved and the company’s business must
be wound up:
(1)
An event specified in the operating agreement.
(2) Consent of the number or percentage of members specified in the
operating agreement.
(3) An event that makes it unlawful for all or substantially all of the business
of the company to be continued, but any cure of illegality within 90 days after notice
to the company of the event is effective retroactively to the date of the event for
purposes of this Section.
(4) On application by a member or a dissociated member, upon entry of a
judicial decree that:
(A) the economic purpose of the company is likely to be unreasonably
frustrated;
2 - 13
(B) another member has engaged in conduct relating to the company’s
business that makes it not reasonably practicable to carry on the company’s
business with that member;
(C) it is not otherwise reasonably practicable to carry on the company’s
business in conformity with the articles of organization and the operating
agreement;
(D) the company failed to purchase the petitioner’s distributional interest
as required by Section 35-60; or
(E) the managers or members in control of the company have acted, are
acting, or will act in a manner that is illegal, oppressive, or fraudulent with
respect to the petitioner.
(5) On application by a transferee of a member’s interest, a judicial
determination that it is equitable to wind up the company’s business.
(6)
Administrative dissolution under Section 35-25.
A literal reading of the Act suggests that all but the third (unlawful business) and fourth
(entry of a judicial decree following a member’s application) of these events of dissolution may
be varied in the operating agreement and that the parties may agree to specify additional events of
dissolution in the operating agreement. 805 ILCS 180/15-5(a), 180/15-5(b)(3). Presumably,
however, the operating agreement cannot alter or vary the Act’s administrative dissolution
provisions.
Even if the operating agreement does not vary or eliminate any of the other events of
dissolution, dissolution will not occur if, after dissolution and before completion of winding up,
the members (including a dissociated member whose dissociation caused the dissolution)
unanimously waive the right to have the LLC’s business wound up and the company terminated.
805 ILCS 180/35-3(b). If there is such a waiver, the LLC’s business continues as if the
dissolution had never occurred, and the rights of third parties arising before receipt of the
notification of the waiver are not adversely affected. Id. See also 805 ILCS 180/35-3(c) for rules
regarding the potential continuation of the LLC after the dissociation of the last remaining
member.
Absent a waiver of dissolution, the LLC continues after dissolution only for the purpose of
winding up the business. 805 ILCS 180/35-3(a). Section 35-4 of the Act sets out the participants
and scope of activities allowed during winding up. Section 35-7(a) provides that an LLC will be
bound by a member’s or manager’s act after dissolution if (1) it is appropriate for winding up the
company’s business or (2) it would have bound the company before dissolution if the other party
did not have notice of the dissolution. Section 35-7(b) provides that members or managers who
know of an LLC’s dissolution can be liable to the LLC for damages resulting from acts not
appropriate for winding up.
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Q. [1.21] Distribution of Assets upon Dissolution
Section 35-10 of the Limited Liability Company Act contains the statutory provisions for the
distribution of assets upon the dissolution of the limited liability company. Section 35-10(a)
provides that in winding up its business, the LLC must first pay creditors, including members
who are creditors. The LLC’s operating agreement may alter this requirement for members or
transferees of a member’s distributional interest. 805 ILCS 180/15-5(a), 180/15-5(b)(4). The
operating agreement may not, however, alter the rights of true third-party creditors to payment
under §35-10(a). 805 ILCS 180/15-5(b)(4).
Following payment of creditors, the default rule is that any surplus must be distributed to
members by (1) returning to members all contributions that have not previously been returned and
then (2) distributing any remainder in equal shares. 805 ILCS 180/35-10(b).
V. [1.22] SINGLE-MEMBER OPERATING AGREEMENT ISSUES
Section 5-1(b) of the Limited Liability Company Act provides that a limited liability
company shall have one or more members. Thus, Illinois, like many states, permits singlemember entities. Under Internal Revenue Service regulations, domestic single-member entities,
unless they elect otherwise, are classified as “disregarded entities.” See Treas.Reg. §301.77013(a). Disregarded entities, when owned by an individual, are considered to be sole proprietorships
for federal income tax purposes. Disregarded entities when owned by C corporations, S
corporations, LLCs, partnerships, or other business entities are generally considered for federal
income tax purposes to be divisions of that entity. Of course, for state law purposes, they are still
separate entities, intended to give liability protection and other benefits of separate ownership.
Section 15.5 of the Act contains the primary provisions regarding operating agreements. No
written or oral operating agreement is required because, in the absence of an agreement, the
default provisions of the Act will control. This generally does not present a legal problem as long
as the entity remains a single-member company. However, there are at least two good reasons for
providing a written operating agreement even for a single-member entity.
First, at some point, almost all LLCs are requested by some third party, such as a bank or
other creditor, to provide a copy of the operating agreement. Providing a simple operating
agreement is generally easier than explaining why the business does not have one and explaining
the provisions of the Act that govern the operations of the entity.
Secondly, there is the all too likely occurrence of a client taking action to transfer an interest
to another member or otherwise admit a second or subsequent member without first consulting
his or her lawyer. The presence of an operating agreement not only makes it less likely that such a
transfer will happen, but can prevent the client from losing critical business control if this does in
fact happen. For example, the admission of a second member, even for a small percentage,
creates default provisions under the Act that call for equal power sharing from a control
standpoint and equal rights to all cash distributions from the LLC. There may also be other
default provisions that a client does not wish to become applicable to the LLC.
2 - 15
The sample form of a single-member operating agreement in §2.24 below provides a simple
format to be responsive to the two needs described above. It identifies the initial owner of the
interests. It names a manager and grants the broadest possible operating authority to the manager.
In §5 of the Agreement, it provides that distributions are to be made in proportion to ownership
interests rather than equally to all members. By making the entity a manager-managed company,
it ensures that the original owner will retain all operating control even if a new member is added
without otherwise amending the operating agreement. The operating agreement even grants the
original member the right to name successor managers, if required.
Of course, if the operating agreement is never disclosed to the new member, the potential
remains for uncertainty as to the enforceability of the provisions of the operating agreement. By
having the entity classified as a manager-managed LLC and having this statement be a public
record, counsel increases the likelihood that the planning undertaken on behalf of the client will
not be distorted through the casual act of inadvertently admitting a new member.
VI. [1.23]
CHECKLIST OF PROVISIONS FOR OPERATING AGREEMENT
The following checklist is intended to assist the attorney in counseling his or her client on the
issues that should be addressed in preparing an operating agreement for a limited liability
company:
A. Formation and Preliminaries
1. Name (805 ILCS 180/1-10)
2. Purpose (805 ILCS 180/1-25)
3. Principal Place of Business
4. Definitions
B. Member Information
1. Names
2. Addresses
C. Registered Agent (805 ILCS 180/1-35)
D. Registered Office (id.)
E. Type of Management
1. Member-Managed (805 ILCS 180/15-1(a))
a. Vote Required for Specified Actions
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(1)
Majority for any general business matter
(2)
Supermajority (e.g., 75 percent) to sell substantially all of the assets
(3)
Unanimous to amend the articles of organization
b. Establishment of Committees
(1)
Executive committee
(2)
Management committee
c. Division of Responsibilities Among Members and/or Committees
2. Manager-Managed (Multiple Managers) (805 ILCS 180/15-1(b))
a. Number of Managers
b. Identity and Addresses of Initial Managers
c. Qualifications Required of Managers
d. Scope of Authority and Specific Limitations
(1)
Can managers act independently or only upon affirmative approval?
(2)
Do members retain any authority?
e. Term
f.
Removal (by Members)
(1)
Vote required
(2)
Cause or without cause
g. Election or Appointment (by Members)
(1)
Vote required
(2) Consider staggered terms
h. Compensation
i.
Vote Required for Specified Actions (by Managers)
(1)
Majority decisions in the ordinary course of business
(2)
Supermajority (e.g., 80 percent) to borrow or lend money
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(3)
Unanimous to sell substantially all of the assets
3. Manager-Managed (Single Manager)
a. Identity and Address of Initial Manager
b. Qualifications Required of Manager
c. Scope of Authority and Specific Limitations
d. Term
e. Removal (by Members)
f.
(1)
Vote required
(2)
Cause or without cause
Election or Appointment (by Members) (Vote Required)
g. Compensation
4. Corporate Management Form
a. Board of Managers (or Board of Governors, Board of Directors, etc.)
(1)
Number
(2)
Scope of authority and specific limitations
(3)
Election or appointment (by members)
(4)
Term
(5)
Removal
(6)
Vote required for specified actions (by managers)
(7)
(a)
Majority
(b)
Supermajority
(c)
Unanimous
Compensation
b. Officers
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(1)
Names of officer positions
(2)
Scope of authority of each officer
(3)
Election and term
F. Contributions and Capital Accounts
1. Initial
a. Form of Contributions (805 ILCS 180/20-1)
(1)
Cash
(2)
Property
(3)
Services
(4)
Promissory note
b. How Paid or Provided
c. Consider Whether There Should Be an Obligation To Perform Written Promise To
Contribute even if Intervening Death, Disability, etc. (default — 805 ILCS 180/205(c))
2. Additional Contributions
a. Affirmative Obligation To Perform
b. Procedure for Contribution Call
c. Debt Guarantees
d. Remedies of Company if Member Fails To Contribute (e.g., loses voting privileges,
dilution, procedures to reacquire interest, etc.)
3. Maintenance of Capital Accounts
a. Treas.Reg. §1.704-1(b)
b. Consider Deficit Restoration Obligation
c. Minimum Gain Chargeback Allocations
d. Qualified Income Offset Allocations
e. Code §754 Election Adjustments
2 - 19
f.
Special Allocations
G. Profit and Loss Allocations
1. Agreed Percentages
2. Per Capita
3. Based on Contributions
4. Special Allocations
5. Other
H. Distributions
1. Per Capita (default — 805 ILCS 180/25-1(a))
2. Other Options
a. Agreed Percentages
b. Proportionate to Book Value
c. Based on Contributions
d. Any “Preferred” or “Priority” Returns
e. Other
3. Timing of Distributions
a. No Interim Distributions Allowed Without Majority Consent of Members (default —
id.)
b. Consider Events or Performance Levels Requiring Distributions
c. Consider Events or Performance Levels Permitting Distributions (and who decides)
4. Consider Whether Source of Distributions Should Change Allocation
a. Income
b. Capital Transactions
c. Liquidation
2 - 20
d. Other
5. Type of Distribution
a. Cash
(1)
Only type of distribution member has right to (default — 805 ILCS 180/251(b))
(2)
Consider modification of default rule
b. Distributions in Kind
I.
(1)
No right to receive; no obligation to accept (default — id.)
(2)
Consider modification of default rule
Conversions and Mergers
1. Merger (unanimous consent required) (default — 805 ILCS 180/15-1(c)(10))
2. Consider Modification of Default Rule
J. Transferability
1. Free Transferability (default requires unanimous consent of all members to transfer
management rights (805 ILCS 180/30-1 through 180/30-10))
a. Can Always Freely Transfer Economic Rights
b. Substituted Member Admitted with all Rights of Member (805 ILCS 180/30-10)
c. Consider Whether Exceptions Should Be Made for Transfers to Family Members or
Others
2. Transfer Restrictions
a. Consider Absolute Prohibition During “Start Up” Period (e.g., initial three years)
b. Vote Required
(1)
Is member approval required?
(a)
Determine who votes (i.e., based on profit allocation, capital allocation,
etc.)
(b)
Determine what percentage is necessary for approval
2 - 21
(2)
Is manager approval required?
(a)
Determine who votes (i.e., all managers, executive committee, etc.)
(b)
Determine what percentage is necessary for approval
c. Right of First Refusal by Other Members
(1)
Pro rata basis using capital accounts or other basis
(2)
Time period and terms of sale
(a)
Determination of price
(b)
Payment terms (period of time, interest rate, etc.)
(c)
Collateral (LLC interest, etc.)
K. Withdrawal of Member
1. Withdrawal at any Time for any Reason?
2. Restrictions on Resignation
a. Prior Written Notice
b. Limitations Based on Financial Condition of Company
3. Distributions upon Resignation
a. Fair Value of Member’s Distributional Interest Must Be Paid (default — 805 ILCS
180/35-60)
b. Consider Other Valuations (e.g., book value, etc.)
c. Consider Other Payment Options
(1)
Payment over period of time
(2)
Interest rate
(3)
Collateral
L. Dissolution
1. Last Date of Existence if in Articles of Organization (805 ILCS 180/5-5(a)(6))
2. Other Events (805 ILCS 180/35-1)
2 - 22
a. Determine Events
(1)
Death or dissolution
(2)
Retirement
(3)
Resignation
(4)
Expulsion
(5)
Bankruptcy
(6)
Voluntary agreement of member
(7)
Other
b. Determine to Whom Events Must Occur in Order To Be Operative (i.e., any member,
specified members, managers, etc.)
3. Vote Required To Continue Business After Event of Dissolution Occurs (default requires
the unanimous vote of remaining members to continue (805 ILCS 180/35-3))
M. Winding Up
1. Percentage Vote Required by Members To Wind Up
2. Distribution of Assets
a. First to Creditors
b. Then for Distributions Declared, Return of Contributions, and to Members as They
Share in Distributions (default — 805 ILCS 180/35-10)
3. Filing of Articles of Dissolution
N. Record Keeping
1. Designate by Whom and Where Maintained
2. Required Documents Are Specified in 805 ILCS 180/1-40
3. Certificates
a. Form
b. Register
c. Transfer Agent
2 - 23
d. Consider No Certificates Since Not Required by Limited Liability Company Act
4. Right of Inspection
5. Fiscal Year
6. Basis of Accounting (cash or accrual)
7. Depository Institution
8. Accounting or Tax Elections
O. Member Relations
1. Meetings
a. When and How Are Called (meetings are not required by the Act)
b. Notices
c. Quorum
d. Action by Written Consent
2. Vote Required for Action
a. Majority
b. Supermajority
3. Tax Matters Partners (Code §6231(a)(7))
4. Arbitration and/or Deadlock Procedures
P. Loans
1. Third-Party Lenders
a. Borrowing Options
b. Authority To Obtain
2. Member Loans
a. Mandatory Call
b. Terms of Loan
2 - 24
Q. Indemnification
1. Mandatory Indemnification (default — 805 ILCS 180/15-7)
2. Consider Modifying Default Rules
3. Consider Insurance
R. Miscellaneous
1. Notices
2. Prevailing Law
3. Amendments
a. Consider Percentage Required for “Routine” Amendments
b. Require Unanimous Consent for Ownership Shifts
4. Consider Whether Proxies Allowed (default — 805 ILCS 180/15-1(e))
5. Telephonic Meetings
6. Waiver of Right To Partition
7. No Third-Party Beneficiaries
8. Attorney in Fact Provision
S. Other Matters Specific or Peculiar To
1. The Business of the LLC
2. The Relationship of the Members Among Themselves
3. The Relationship of the Members to the Managers
4. The Regulation or Management of the LLC
VII. APPENDIX — SAMPLE FORMS
A. [2.24] Operating Agreement (Single-Member)
OPERATING AGREEMENT OF _______________ LLC
2 - 25
OPERATING AGREEMENT OF JOHN DOE REALTY LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT (“Agreement”) is made and
entered into as of the ____ day of __________, 2006, by JOHN DOE, of ___________, Illinois, its
sole member (“Doe”).
RECITALS
A.
John Doe Realty LLC (“Company”) was formed as an Illinois limited liability
company on ________________, 2006, by the filing of Articles of Organization with the Secretary
of State of the State of Illinois.
B.
Doe desires to provide for certain agreements governing the business and affairs of
the Company.
AGREEMENTS
1.
Name. The name of the Company is John Doe Realty LLC; provided that the
Manager may, from time to time, change the name of the Company to any name permitted by the
Illinois Limited Liability Company Act, 805 ILCS 180/1-1 through 805 ILCS 180/60-1, as the same
may be amended from time to time (“Act”).
2.
Registered Office and Registered Agent. The Company’s registered office in the
State of Illinois is ______________________________________________________________.
The name of the Company’s registered agent at such address is __________________________.
The Manager may, from time to time, change the registered office and the registered agent of the
Company.
3.
Term. The term of the Company shall be perpetual, unless the Company is earlier
dissolved in accordance with the provisions of this Agreement.
4.
Business of the Company. The business of the Company shall be to engage in any
lawful businesses and activities for which limited liability companies may be organized under the
Act.
5.
Ownership and Distributions. As of the date hereof, Doe owns all of the limited
liability company interests in the Company. All distributions will be made to the Members in
proportion to their ownership of interests in the Company. No owner shall be admitted as a Member
of the Company without the express written consent of all other Members and the Manager.
2- 26
Manager Managed. The business and affairs of such Company shall be managed
6.
exclusively by the Manager and by such officers of the Company, if any, as may be appointed from
time to time by the Manager pursuant to Paragraph 8 of this Agreement. Except where the approval
of the Members is expressly required by non-waivable provisions of the Act, the Manger shall have
full and complete authority, power and discretion to direct, manage and control the business, affairs
and properties of the Company. JOHN DOE shall be the “Manager” and, in the event of the death,
incompetency, resignation, removal, bankruptcy or the execution of an assignment for the benefit of
creditors of JOHN DOE, then ________________ shall replace him as Manager. At any time there
are two or more Members of the Company, JOHN DOE shall have full power and authority to
designate, remove and replace the Manager.
7.
Powers and Authority of the Manager. Without limiting the generality of Paragraph
6, all decisions relating to the management and control of the conduct of the business of the
Company and its affairs shall be made by the Manager, including, but not limited to, decisions
relating to any of the following: (i) the selection of representatives of the Company to serve on the
management, supervisory or other governing boards or bodies of any company or other organization
in which the Company owns an interest; (ii) the hiring and termination of employees of the
Company; (iii) distributions to the Members; (iv) the opening of bank accounts, the making of loans
to any third party, the incurrence or refinancing of indebtedness of the Company, and the
encumbering of Company property; (v) the selection of attorneys, accountants, appraisers and
agents; and (vi) the entry into or performance of , on behalf of the Company, all other contracts,
agreements and other undertakings and the taking of any other action as may be necessary or
advisable in the judgment of the Manager or incident to carrying out in the business of the Company.
Any contract, agreement, instrument or other document to which the Company is a party and which
is duly authorized by the Manager may be signed by the Manager or an authorized officer of the
Company, and no other signatures shall be required.
8.
Officers. The Manager may appoint such officers and agents as he shall deem
necessary, who shall hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Manager.
9.
Indemnification. The Company (to the extent of all of its assets and without any
obligation on the part of any Member to contribute funds to the Company, but subject to any lien or
security interests held by any person) shall indemnify and save harmless each Manager and each
Member from any loss or damage incurred by it by reason of any act performed by it for and on
behalf of the Company and in furtherance of the Company’s interest, provided such act or acts were
done in good faith and without malfeasance, gross negligence or willful misconduct on the part of
the Manager or Member. Except as otherwise expressly and specifically provided herein, a Member
shall have no obligation or liability to any other Member or, except as otherwise expressly provided
by the Act, to any other person or entity, in such Member’s capacity as a Member.
2 - 27
Dissolution. The Company shall be dissolved upon the occurrence of either of the
10.
following events: (a) by the written agreement of the Members; or (b) the sale of substantially all of
the assets of the Company.
11.
Inconsistencies. In the event of any inconsistency between this Agreement and the
Act, to the extent permitted by applicable law, the terms of this Agreement shall govern.
12.
Applications of Illinois Law. This Agreement and its interpretation shall be governed
exclusively by its terms and by the laws of the State of Illinois.
13.
Amendments. This Agreement may not be amended except in writing by a majority
in interest of the Members.
14.
Heirs, Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the Members and their heirs, legal representatives, successors and assigns.
15.
Creditors. None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditors of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the dated first
written above.
MEMBER:
___________________________________
John Doe
2 - 28
OPERATING AGREEMENT
OF
123 MAIN STREET, L.L.C.,
AN ILLINOIS LIMITED LIABILITY COMPANY
2
TABLE OF CONTENTS
ARTICLE I DEFINITIONS
ARTICLE II FORMATION OF THE COMPANY
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
Formation
Name
Purpose; Powers
Term
Principal Place of Business
Registered Office and Registered Agent
Continuation of Company
Qualification in Other Jurisdictions
ARTICLE III PREFERRED AND COMMON INTERESTS
3.1
3.2
3.3
3.4
Preferred Interests
Common Interests
Interests as Personal Property
Persons Deemed Members
ARTICLE IV CAPITAL CONTRIBUTIONS
4.1
4.2
4.3
4.4
4.5
4.6
Capital Contributions of Members
Capital Accounts
Interest on Capital Contributions
Withdrawal of Contributions
Return of Capital
Liability of Members
ARTICLE V ALLOCATION OF COMPANY PROFITS AND LOSSES
5.1
5.2
5.3
5.4
Allocations
Special Allocations
Other Allocation Rules
Allocations Solely For Tax Purposes
ARTICLE VI DISTRIBUTIONS AND DISTRIBUTABLE CASH
6.1
6.2
6.3
6.4
6.5
Timing and Amount
Distributions upon Liquidation or Sale
Limitations on Distributions
Distributions in Respect of Illinois Replacement Tax Savings
Distributions in Respect of Members ' Income Tax
2 - 29
ARTICLE VII VOTING RIGHTS AND MEETINGS
7.1
7.2
7.3
Vote per Member
Designation of Member Representatives
Meetings of the Members
ARTICLE VIII MANAGEMENT
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
8.12
8.13
Management of the Company
Management Actions Requiring Unanimous Consent
Reliance by Third Parties
No Management by Members Not Managers
Business Transactions of a Manager with the Company
Tenure of Manager
Exculpation from Liability for Certain Acts
Indemnification of Manager
Resignation and Withdrawal
Property Management
Leasing and Sale Brokerage
Compensation of Manager
Other Businesses
ARTICLE IX LIMITATIONS ON DISPOSITION OF MEMBERS' INTERESTS (ALT. "A")
9.1
9.2
9.3
9.4
9.5
9.6
Basic Limitations
Investment Representations and Warranties
Restrictions on Transfer of Interests
Interests in Member
Put-Call Arrangement
Operating Rules
ARTICLE IX LIMITATIONS ON DISPOSITION OF MEMBERS' INTERESTS (ALT. "B")
9.1
9.2
9.3
9.4
9.5
Basic Limitations
Investment Representations and Warranties
Restrictions on Transfer of Interests
Interests in Member
Restrictions on Preferred Interests
ARTICLE X DISSOLUTION AND TERMINATION
10.1
10.2
10.3
10.4
Events of Dissolution
Liquidation
Filings
Termination
2 - 30
OPERATING AGREEMENT OF 123 MAIN STREET, L.L.C.
This Operating Agreement of 123 Main Street, L.L.C. is entered into by and among John
Doe ("Doe"), Bob, L.L.C. ("Bob"), an Illinois limited liability company; Larry, L.L.C. ("Larry"),
an Illinois limited liability company; Fred Corporation ("Fred"), an Illinois corporation; and any
Person who hereafter becomes a party hereto pursuant to the provisions hereof, and is made
effective as of ___________ , 2006, the effective date of the Articles of Organization of 123 Main
Street, L.L.C., an Illinois limited liability company.
ARTICLE I
DEFINITIONS
The following terms used herein shall have the following meanings (unless otherwise
expressly provided herein, or unless the context clearly indicates otherwise):
1.1
"Act" means the Illinois Limited Liability Company Act 805 ILCS 180/1-1, et
seq., as amended from time to time (or any corresponding provisions of succeeding law).
1.2
"Agreement" means this Operating Agreement of Limited Liability Company of
123 MAIN STREET, L.L.C.
1.3
"Book Value" means, with respect to any Company property, the Company's
adjusted basis for federal income tax purposes, adjusted from time to time as required or permitted
under Treasury Regulations §§ 1.704-1(b)(2)(iv)(d) through Treasury Regulations §§ 1.7041(b)(2)(iv)(g).
1.4
"Capital Account" means the account maintained for each Member in
accordance with the provisions of the Code and the regulations promulgated thereunder,
including but not limited to the rules regarding maintenance of capital accounts set forth in
Treasury Regulations § 1.704-1.
1.5
"Capital Contribution" means, with respect to any Member originally executing
this Agreement, the capital contribution such Member actually makes pursuant to Article IV
hereof; and with respect to any successor or assignee of any such Member's Interests, that
amount of capital that is in the same proportion to the total capital contributed by such Member
originally executing this Agreement with respect to such Member's Interests (Preferred or
Common, as the case may be) as the Percentage Interest in the Company represented by such
Interests received by such successor or assignee from such Member bears to the total Percentage
Interest in the Company represented by such Member's applicable class of Interests immediately
prior to the event or transaction pursuant to which such successor or assignee received such
interest.
1.6
"Certificate" means the Articles of Organization filed with the Office of the
Secretary of State of Illinois on _________________ , 2006.
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______ 1.7 "Code" means the Internal Revenue Code of 1986, as amended. Any reference to
any specific provision of the Code or any regulations promulgated thereunder shall also refer to
any successor provisions thereto.
1.8
"Common Member" means any Member that holds Common Interests, in such
Member's capacity as a holder of Common Interests.
1.9
"Common Share" means, with respect to a Common Member's Common
Interests, a percentage equal to the fraction having a numerator equal to the amount of Interests
held by such Common Member and having a denominator equal to the aggregate amount of all
Common Interests outstanding.
1.10 "Common Interests" means, collectively, Interests issued by the Company that
represent common limited liability company Interests in the Company.
1.11 "Company" means 123 MAIN STREET, L.L.C., the Illinois limited liability
company to be operated in accordance with the provisions of this Agreement.
1.12 "Company Losses" means items of Company loss and deduction determined in
accordance with Paragraph 4.2(b) of this Agreement.
1.13 "Company Minimum Gain" means an amount equal to the Company minimum
gain, as determined in accordance with Treasury Regulations § 1.704-2(d).
1.14 "Company Profits" means items of Company income and gain determined in
accordance with Paragraph 4.2(b) of this Agreement.
1.15 "Deficit Capital Account" means, with respect to any Member, the deficit
balance (if any) in such Member's Capital Account as of the end of the Fiscal Period or Fiscal
Year, after giving effect to the following adjustments:
(a)
credit to such Capital Account any amount that such Member is treated
as being obligated to restore under Treasury Regulations § 1.704-1(b)(2)(ii)(c), as well as
any addition thereto pursuant to the penultimate sentence of Treasury Regulations § 1.7042(g)(1) and Treasury Regulations § 1.704-2(i)(5), after taking into account any changes
during the period in Company Minimum Gain and in the Member Minimum Gain; and
(b)
debit to such Capital Account the items described in Treasury
Regulations §§ 1.704-1(b)(ii)(d)(4), 1.704-1(b)(ii)(d)(5) and 1.704-1(b)(ii)(d)(6).
This definition of "Deficit Capital Account" is intended to comply with Treasury Regulations §§
1.704-1(b)(2)(ii)(d) and 1.704-2 and shall be construed in a manner consistent with those
provisions.
1.16 "Distributable Cash" means, for each Fiscal Year or a portion thereof, all cash
of the Company derived from any source after deducting (a) all cash expenditures incurred in
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connection with the operation of the Company's business, (b) an amount necessary to pay all
liabilities of the Company then due and owing including, without limitation, all loans to the
Company and all advances made by any Member to the Company, and (c) an amount
determined by the Managers to be reasonably necessary or desirable as a reserve for the
operation of the Company business, liabilities of the Company not yet due, and/or future or
contingent liabilities of the Company.
1.17 "Economic Interest Owner" means a person who is an owner of an Interest who
is not a Member. The rights of an Economic Interest Owner are described in Paragraph 9.3(c)
below.
1.18 "Fiscal Period" means any interim accounting period within a Fiscal Year that is
established by the Managers and that is required or permitted under the Code or Treasury
Regulations.
1.19 "Fiscal Year" means the Company's annual accounting period established
pursuant to Paragraph 11.1 of this Agreement.
1.20 "Illinois Replacement Tax" means (a) the Illinois Personal Property Tax
Replacement Income Tax, 35 ILCS 5/201 et seq., as amended from time to time, and (b) if the
Company is subject to any other state tax (i.e., state tax other than Illinois Replacement Tax) the
amount of which is dependent upon the tax character of some or all of the Members, the Managers
may, in their discretion, treat such other state tax as Illinois Replacement Tax for all purposes of
this Agreement.
1.21 "Illinois Replacement Tax Savings" means, with respect to a Fiscal Year for
which the Company is subject to Illinois Replacement Tax, the amount (if any) of additional
Illinois Replacement Tax that would have been imposed upon the Company for such Fiscal Year
but for the fact that some of the Members are themselves subject to the Illinois Replacement Tax for
such Fiscal Year.
1.22 "Interest" means the personal property ownership right of a Member or an
Economic Interest Owner in the Company entitling such Person to, among other things, an
allocation of the Company's income, gains, losses, deductions and credits (for both book and tax
purposes) and a share of distributions made by the Company, such personal property ownership
right being evidenced by and composed of Interests. Each Person's allocation of the Company's
income, gains, losses, deductions and credits (for both book and tax purposes) and share of the
Company's distributions shall be determined in accordance with this Agreement based upon the
amount and type of Interests owned by such Person.
1.23 "Majority Vote" means an affirmative vote of Common Members who and that
are entitled to vote, with respect to Interests held by such Common Members and representing
more than one half of the total votes that may be cast (regardless of whether such votes are
actually cast) by Members entitled to vote on the matter under consideration.
1.24
"Manager" means a Person designated in accordance with Articles VII and VIII
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2
hereof to act as a manager of the Company, which Person may, or may not, be a Member.
1.25 "Member" means any Person that holds an Interest in the Company represented
by Interests and is admitted as a Member of the Company pursuant to the provisions of this
Agreement, in such Person's capacity as a Member of the Company.
1.26 "Member Minimum Gain" means an amount, with respect to each Member
Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member
Nonrecourse Debt were treated as a Company nonrecourse liability, as determined in accordance
with Treasury Regulations § 1.704-2.
1.27 "Member Nonrecourse Debt" shall have the same meaning as the term "partner
nonrecourse debt" set forth in Treasury Regulations § 1.704-2(b)(4).
1.28 "Member Nonrecourse Deductions" shall have the same meaning as the term
"partner nonrecourse deductions” set forth in Treasury Regulations §§ 1.704-2(i)(1) and 1.7042(i)(2).
1.29 "Nonrecourse Deductions" shall have the meaning set forth in Treasury
Regulations § 1.704-2(b)(1).
1.30 "Nonrecourse Liability" shall have the meaning set forth in Treasury
Regulations § 1.704-2(b)(3).
1.31 "Percentage Interest" means, with respect to Interests of any class held by any
Member as of any date, the ratio (expressed as a percentage) equal to the fraction having a
numerator equal to the amount of Interests held by such Member and having a denominator equal
to the aggregate amount of all Interests of the same class outstanding on such date.
1.32 "Person" means any individual, corporation, association, partnership (general or
limited), joint venture, trust, estate, limited liability company, or other legal entity or organization.
1.33 "Preferred Member" means any Member that holds Preferred Interests, in such
Member's capacity as a holder of Preferred Interests.
1.34 "Preferred Share" means, with respect to a Preferred Member's Preferred
Interests, a percentage equal to the fraction having a numerator equal to the amount of Preferred
Interests held by such Preferred Member and having a denominator equal to the aggregate amount
of all Preferred Interests outstanding.
1.35 "Preferred Interests" means, collectively, Interests issued by the Company that
represent preferred limited liability company Interests in the Company.
1.36 "Subscription Agreement" means an agreement by which a Member commits
to purchase Interests.
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1.37 "Tax Matters Partner" means the Manager designated as such in Paragraph
12.1(b) of this Agreement.
1.38 "Tax Percentage" means, as of any distribution date, the sum of (a) the
maximum federal income tax rate on ordinary income (i.e., income other than capital gain) of an
individual, as specified in Code §1(a), plus (b) the maximum Illinois income tax rate on ordinary
income of an individual resident of Illinois, as specified in § 201(b) of the Illinois Income Tax Act.
1.39 "Treasury Regulations" means the proposed, temporary and final regulations
promulgated under the Code, as amended from time to time.
1.40 "Withdrawal" means, with respect to any Member, the death or bankruptcy of
such Member or a complete disposition of such Member's entire Interest in the Company made
during the lifetime (or other existence) of such Member.
ARTICLE II
FORMATION OF THE COMPANY
2.1 Formation. On __________________ , 2006, the Company was organized as an
Illinois limited liability company.
2.2 Name. The name of the Company is 123 MAN STREET, L.L.C., and appropriate
certificates and affidavits shall be filed and recorded as maybe necessary to secure that name for
the sole and exclusive use of the Company; provided, however, that the name shall be subject to
change by the Managers of the Company.
2.3 Purpose; Powers. The purpose of the Company is (a) to purchase the real
property located at 123 Main Street, __________, Illinois, and legally described on Schedule 2
attached hereto (the "Property"); (b) to operate and manage multifamily housing developments,
commercial developments, mixed use properties, condominium developments and other real
estate projects or developments of any type or character; (c) to develop real estate projects on a fee
basis for others or for its own account; (d) to own, renovate, operate, lease, finance and sell
interests in real and personal property; (e) to enter into joint venture agreements, partnership
agreements, or limited liability company operating agreements, or to create any other entity or any
other agreement for the purposes of carrying out any of its purposes and actions; and (f) to do
anything and all things permitted by the Act necessary or appropriate for the purposes set forth
above. The Company shall possess and may exercise all powers and privileges granted by the Act,
by any other law, or by this Agreement, including incidental powers thereto, to the extent that such
powers and privileges are necessary, customary, convenient or incidental to the attainment of the
Company's purposes.
2.4
Term. The term of the Company commenced on the date that the Certificate was
filed in the Office of the Secretary of State of the State of Illinois and shall continue until the
Company is dissolved in accordance with the provisions of either this Agreement or the Act.
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2.5
Principal Place of Business. The principal place of business of the Company shall
be located at____________________________, Illinois __________.
2.6
Registered Office and Registered Agent. The Company's initial registered office
shall be at___________________________, Illinois ________, and the name of its initial
registered agent at such address shall be___________________________. The registered office
and registered agent may be changed from time to time by filing the address of the new registered
office and/or the name of the new registered agent with the Office of the Secretary of State of the
State of Illinois and paying any fees required under the Act.
2.7 Continuation of Company. The Members hereby agree that the Company shall be
organized, administered, operated and terminated in accordance with the provisions of this
Agreement and the Act. The Members hereby further agree that the rights, duties, liabilities and
obligations of the Members shall be governed by the provisions of this Agreement and the Act.
References in the Agreement to actions or applicable provisions that may be required by the Act shall
only apply to those provisions of the Act that, under the Act, expressly cannot be waived or
superseded by an operating agreement as provided in § 15-5 of the Act. In the case of any conflict
or inconsistency between this Agreement and the Act, the provisions of this Agreement shall control
to the maximum extent permitted by law.
2.8 Qualification in Other Jurisdictions. The Managers shall cause the Company to be
qualified, formed or registered under assumed or fictitious name statutes or similar laws in any
jurisdiction in which the Company conducts business and in which such qualification, formation or
registration is required by law or deemed advisable by the Managers. Any Manager, as an
authorized person within the meaning of the Act, shall execute, deliver and file any 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 do business.
ARTICLE III
PREFERRED AND COMMON INTERESTS
3.1 Preferred Interests. Except as may be hereinafter provided, the Interests in the
Company designated as Preferred Interests shall be non-voting Interests, but shall carry priority
rights as to distributions of Distributable Cash both from operations and from a sale or liquidation
of the Company, all as hereinafter provided.
3.2 Common Interests. The remaining Interests in the Company shall be designated as
Common Interests.
3.3 Interests as Personal Property. The Interest of each Member in the Company,
whether reflected in Interests held by a Member or in a mere distributional interest as defined in
Article 30 of the Act of a transferee who has not been admitted as a Member, sometimes referred
to as an Economic Interest Owner, is personal property.
3.4
Persons Deemed Members. The Company may treat the Person in whose name
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any Interest shall be registered on the books and records of the Company as a Member as the sole
holder of such Interest for all purposes whatsoever and, accordingly, shall not be bound to
recognize any equitable or other claims to or interest in such Interest on the part of any other
Person, whether or not the Company shall have actual or other notice thereof.
ARTICLE IV
CAPITAL CONTRIBUTIONS
4.1
Capital Contributions of Members.
(a)
The initial Members of the Company (who shall be holders of both
Preferred and Common Interests) shall be as set forth on Schedule 1, "Initial Capital
Contributions and Subscriptions of Members,” attached hereto. Doe, as the sole initial
Preferred Member, shall contribute to the capital of the Company $_______, plus the real
property located at 123 Main Street, _________, Illinois, as legally described on
Schedule 2 attached hereto. The initial agreed value of such capital contribution is set
forth on Schedule 1. The Common Members shall contribute to the capital of the Company
the respective amounts set forth on Schedule 1 and shall receive therefor the amount of
Common Interests set forth opposite each Member's name thereon. Capital contributions
of the Common Members may be in the form of cash or any other form acceptable to the
Managers.
Alternative A
(b)
If by , _________2006, either (1) the Company has not acquired legal
title to the Property and incurred debt in an amount sufficient to repay to Bob or the
Member Representative of Bob all amounts then owing to Bob or its affiliates under Bob's
one million dollar ($1,000,000) loan evidenced by the Promissory Note dated _______,
2006, (the "Bob Note") from REAL PROPERTY, LTD. and all other amounts, if any that
Bob or the Member Representative of Bob may have advanced in connection with the
business of the Company; or (2) at any time there is a default by Larry or any affiliate of
Larry under any construction contract for the build out work or other construction work on
the Property (the "Construction Contracts") in either failing to complete the work within
the designated time periods or failing to pay subcontractors and suppliers, Bob shall have
the right from time to time to require the Members to contribute additional capital to the
Company in an amount not to exceed in the aggregate the amounts then owing to Bob, its
Member Representative or affiliates from the Company, and all funds then due to Larry or
any of its affiliates under any of the Construction Contracts with the Company, or such
lesser amount as shall be determined by Bob in its sole discretion. Such contributions shall
be made within ninety (90) days after the Members have received a written notice from
Bob setting forth the aggregate amount of capital to be contributed by the Members and
the amount of additional capital to be contributed at such time by each Member, which
capital shall be payable by the Members in proportion to their respective number of
Common Interests owned by each Member. If any Member fails to contribute any amount
less than its full share of the capital call, then such Member's ownership of Common
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Interests shall be diluted by sixty (60%) percent and the ownership of Common Interests by
Bob shall be automatically increased by the amount of such dilution.
NOTE: This is an example of deal specific criteria triggering a requirement for additional
capital contributions and providing a penalty for a failure to comply.
Alternative B
(b)
Additional Capital Contributions, if the Managers determine they are
required for the reasonable needs of the business of Company, shall be raised by the
Managers through the issuance of additional Interests, carrying such rights and priorities
as the Managers determine. Each Common Member of the Company shall have the right
to subscribe for his or her proportionate share of new Interests under such terms and
conditions as the Managers provide. This right to subscribe for new Interests shall not
apply to Interests issued as compensation for services provided to the Company. Any
Interests issued as compensation for services provided to the Company, as provided in
Paragraph 8.1(e), shall be subject to such vesting provisions, priorities, including
limitations on sharing in proceeds of liquidation or sale, or other requirements or
conditions as determined by the Managers. This shall include the right to create additional
classes of Interests, and provisions determining whether the dilution of existing holders of
Interests will be proportional or limited to certain Interest holders only, all as determined
by the Managers. It is the intention that Interests issued after the date hereof in exchange
for services shall be issued subject to the limitation that each Member will, with respect to
such Interests, share only in future profits and future appreciation in value of the
Company. Unless the Managers provide otherwise, such Members shall share in future
distributions of proceeds of liquidation or sale only to the extent that the aggregate value
of the Company has increased above the value of the Company as of the date of issuance of
such Interests. These provisions shall apply to all future issuances of Interests for
services, even when such Interests are issued to persons who are already Members of the
Company. The purpose of this limitation is to classify such Interests as profits interests, as
such term is used in the Treasury Regulations, so that the issuance of such profits interests
will not be a taxable event to the Company or to any Member.
4.2
Capital Accounts.
(a)
A separate Capital Account will be maintained for each Member in
accordance with Treasury Regulations §§ 1.704-1(b)(2)(iv) and 1.704-2, as amended.
Each Member's Capital Account will be increased by (1) the amount of money contributed
by such Member to the Company; (2) the fair market value of property contributed by
such Member to the Company (net of liabilities secured by such property that the
Company assumes or takes subject to for purposes of Code § 752); and (3) allocations to
such Member of Company Profits and other allocations to such Member of items of
Company income or gain. Each Member's Capital Account will be decreased by (1) the
amount of money distributed to such Member by the Company; (2) the fair market value
of property distributed to such Member by the Company (net of liabilities secured by such
distributed property that such Member is considered to assume or take subject to under
Code § 752); and (3) allocations to such Member of Company Losses and other
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allocations to such Member of items of Company loss or deduction. The Company may,
upon the occurrence of the events specified in Treasury Regulations § 1.7041(b)(2)(iv)(f), increase or decrease the Capital Accounts in accordance with the rules of
Treasury Regulations §§ 1.704-1(b)(2)(iv)(f) and 1.704-1(b)(2)(iv)(g) to reflect a
revaluation of Company property.
(b)
For purposes of computing the amount of any item of Company income,
gain, loss or deduction to be reflected in the Members' Capital Accounts and to be
allocated pursuant to Article V of this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination, recognition and
classification for federal income tax purposes (including any method of depreciation, cost
recovery or amortization used for this purpose), provided that:
(i)
The computation of all items of income, gain, loss and deduction
shall include income and expense of the Company that are exempt from federal
income tax and also those items described in Code § 705(a)(2)(B) or Treasury
Regulations § 1.704-1(b)(2)(iv)(i), without regard to the fact that such items are
not includible in gross income or deductible for federal income tax purposes;
(ii)
If the Book Value of any Company property is adjusted pursuant
to Treasury Regulations §§ 1.704-1(b)(2)(iv)(e) or (f), the amount of such
adjustment shall be taken into account as gain or loss from a disposition of such
property;
(iii)
Items of income, gain, loss or deduction attributable to the
disposition of Company property having a Book Value that differs from its
adjusted basis for federal income tax purposes shall be computed by reference to
the Book Value of such property;
(iv)
Items of depreciation, amortization and other cost recovery
deductions with respect to Company property having a Book Value that differs
from its adjusted basis for federal income tax purposes shall be computed by
reference to the Book Value of such property in accordance with Treasury
Regulations § 1.704-1(b)(2)(iv)(g);
(v)
To the extent an adjustment pursuant to Code § 732(d), § 734(b)
or § 743(b) to the adjusted tax basis of any Company property is required, pursuant
to Treasury Regulations § 1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the tax
basis) or loss (if the adjustment decreases the tax basis); and
(vi)
Items of Company income, gain, loss or deduction that are
specially allocated pursuant to Paragraph 5.2 shall be determined in the same
manner as Company Profits and Company Losses, but such specially allocated
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items shall not be taken into account in computing Company Profits and Company
Losses.
(c)
The rules set forth in this Paragraph 4.2 are intended to comply with the
requirements of the Code and Treasury Regulations. If, in the opinion of the Managers and
the Company's tax advisors, the rules set forth in this Paragraph 4.2 must be modified in
order for the Company to comply with the requirements of the Code or the Treasury
Regulations, then the method in which Capital Accounts are maintained shall be so
modified.
4.3
Interest on Capital Contributions. No Member shall receive interest on his or her
Capital Contribution.
4.4
Withdrawal of Contributions. Except as otherwise expressly provided in this
Agreement, no Member shall have the right to withdraw or reduce his or her Capital
Contribution or to demand and receive property other than cash from the Company in the event
of a return of such Member's Capital Contribution.
4.5
Return of Capital. The Preferred Member, as provided, in Article V below, shall
be entitled to a preferred return of its Capital Contribution. Except as otherwise provided in this
Agreement or required under the Act, no Common Member shall have priority over any other
Common Member as to the return of any Capital Contribution. Any return of capital to the
Members shall be solely from Company assets and the Members shall not be personally liable for
any such return except as provided in the Act.
4.6
Liability of Members. Except as required under the Act or any other provision of
this Agreement, no Member shall have any obligation to restore any portion of any Capital
Account deficit or to contribute to the capital of the Company; nor shall any Member have any
personal liability for debts or other obligations of the Company, including without limitation
obligations for federal and state income taxes and any Illinois Taxes.
ARTICLE V
ALLOCATION OF COMPANY PROFITS AND LOSSES
5.1
Allocations. After the special allocations described in Paragraph 5.2 of this
Agreement have been given, Company Losses and Company Profits shall be allocated to and
among the Members as follows:
(a)
Company Losses for a Fiscal Year or other Fiscal Period shall be
allocated to and among the Members as follows:
(i)
First, such Company Losses shall be allocated to the Common
Members, pro rata on the basis of the amount of Interests held by such Common
Members, to the extent of their aggregate positive balances in their Capital
Accounts;
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(ii)
Second, such Company Losses shall be allocated to the Preferred
Members to the extent of their positive balances in their Capital Accounts, in
proportion to such balances;
(iii)
Third, except as otherwise provided in Paragraph 5.1(a)(iv), such
Company Losses shall be allocated to and among all Common Members pro rata
on the basis of the amount of Interests held by such Members; and
(iv)
If the allocation of any portion of the Company Losses for a
Fiscal Year or other Fiscal Period pursuant to Paragraphs 5.1(a)(i), (ii) and (iii)
above would cause any Members to have a Deficit Capital Account at the end of
such Fiscal Year or other Fiscal Period, then all of such portion of such Company
Losses shall instead be allocated among the other Members and such allocation
shall be made pro rata on the basis of the amount of Interests held by such other
Members to the maximum extent possible without causing any Member to have a
Deficit Capital Account at the end of such Fiscal Year or other Fiscal Period.
(b)
Company Profits for a Fiscal Year or other Fiscal Period shall be
allocated to and among the Members as follows:
(i)
First, to the extent of the excess (if any) of the amount of
Company Losses for the current Fiscal Year or other Fiscal Period and all prior
Fiscal Years or other Fiscal Periods allocated pursuant to Paragraph 5.1(a)(iv)
over the amount of Company Profits allocated pursuant to this Paragraph 5.1(b)(i)
for all prior Fiscal Years or other Fiscal Periods, such Company Profits shall be
allocated to and among all Members in proportion and to the extent that such
Members were allocated such excess amount of Company Losses;
(ii)
Second, such Company Profits shall be allocated to the Members
in an amount proportionate to the amount of Distributable Cash actually
distributed to such Members for such Fiscal Year, up to the amount of such
Distributable Cash so received;
(iii)
Third, such Company Profits shall be allocated to the Preferred
Members to the extent necessary to cause their Capital Accounts to be equal to
their then liquidation payment computed under Paragraph 6.2(a) below, as if all
of the assets of the Company were then being sold and distributed in liquidation;
and
(iv)
the balance, if any, of such Company Profits shall be allocated to
and among all Common Members pro rata on the basis of the amount of Interests
held by such Members.
5.2
Special Allocations. The following special allocations will be made in the
following order:
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(a)
Company Minimum Gain Chargeback. Except as otherwise provided in
§1.704-2(f) of the Treasury Regulations, notwithstanding any other provision of this
Article V, if there is a net decrease in Company Minimum Gain during any Fiscal Year,
each Member shall be specially allocated items of Company income and gain for such
Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to each
Member's share of the net decrease in Company Minimum Gain, determined in accordance
with Treasury Regulations §1.704-2(g). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items to be so allocated shall be determined in accordance
with §§ 1.704-2(f)(6) and 1.704-2(j)(2) of the Treasury Regulations. This Paragraph 5.2(a)
is intended to comply with the minimum gain chargeback requirement in § 1.704-2(f) of
the Treasury Regulations and shall be interpreted consistently therewith.
(b)
Member Minimum Gain Chargeback. Except as otherwise provided in
§1.704-2(i)(4) of the Treasury Regulations, notwithstanding any other provision of this
Article V, if there is a net decrease in Member Minimum Gain attributable to a Member
Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member
Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance
with § 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal
Years) in an amount equal to such Member's share of the net decrease in Member
Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance
with Treasury Regulations § 1.704-2(i)(4). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items to be so allocated shall be determined in accordance
with §§ 1.704-2(i)(4) and 1.704-2(j)(2) of the Treasury Regulations. This Paragraph is
intended to comply with the minimum gain chargeback requirement in § 1.704-2(i)(4) of
the Treasury Regulations and shall be interpreted consistently therewith.
(c)
Qualified Income Offset. In the event any Member unexpectedly receives
any adjustments, allocations or distributions described in Treasury Regulations § 1.7041(b)(2)(ii)(d)(4), § 1.704-1(b)(2)(ii)(d)(5) or § 1.704-1(b)(2)(ii)(d)(6), items of Company
income and gain shall be specially allocated to each such Member in an amount and
manner sufficient to eliminate, to the extent required by the Treasury Regulations, such
Member's Deficit Capital Account.
(d)
Gross Income Allocation. In the event any Member has a Deficit Capital
Account at the end of any Fiscal Year, each such Member shall be specially allocated
items of Company income and gain in the amount of such Deficit Capital Account as
quickly as possible, provided that an allocation pursuant to this Paragraph 5.2(d) shall be
made only if and to the extent that such Member would have a Deficit Capital Account
after all other allocations provided for in this Article V (other than Paragraphs 5.2(c) and
5.2(d)) have been made.
(e)
Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year
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shall be specially allocated among the Members in proportion to their Percentage
Interests.
(f)
Member Nonrecourse Deductions. Member Nonrecourse Deductions for
any Fiscal Year shall be specially allocated to the Member who bears the economic risk of
loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable in accordance with Treasury Regulations § 1.704-2(i)(1).
(g)
Section 754 Adjustments. To the extent that an adjustment to the tax basis
of any Company property pursuant to Code §734(b) or §743(b) is required pursuant to
Treasury Regulations §§ 1.704-1(b)(2)(iv)(m)(2) or (m)(4) to be taken into account in
determining Capital Accounts as a result of a distribution to a Member in complete
liquidation of its Interest, the amount of such adjustment to Capital Accounts shall be
treated as an item of gain or loss and shall be specially allocated to the Members in
accordance with their interests in the Company in the event Treasury Regulations §
1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such distribution was made in
the event Treasury Regulations § 1.704-1(b)(2)(iv)(m)(4) applies. Other items of gain or
loss described in Paragraph 4.2(b)(v) shall be allocated in a manner consistent with the
manner in which the corresponding adjustments to Capital Accounts are made.
(h)
Allocations Relating to Taxable Issuance of lnterests. Any income, gain,
loss or deduction realized as a direct or indirect result of the issuance of an Interest by
the Company to a Member shall be allocated among the Members so that, to the extent
possible, the net amount of such items, together with all other allocations under this
Agreement to each Member, shall be equal to the net amount that would have been
allocated to each Member if such items had not been realized.
(i)
Allocations Relating to Illinois Personal Property Tax Replacement
Income Tax. If the Company incurs liability for Illinois Replacement Tax for a Fiscal
Year with respect to which the Company also realizes Illinois Replacement Tax Savings,
then items of Company loss or deduction attributable to the Company's Illinois
Replacement Tax expense shall be allocated to the Members that are not themselves
subject to the Illinois Replacement Tax for such Fiscal Year and such allocation shall be
made in proportion to the amount of Company Profits allocated to such Members for the
period with respect to which such Illinois Replacement Tax is imposed.
(j)
Allocations Relating to Recapture Income. All recapture of income tax
deductions resulting from the sale or disposition of Company property shall be allocated to
the Members to whom the deduction that gave rise to such recapture was allocated
hereunder, or to such Members' successors, to the extent that such Members are allocated
any gain from the sale or other disposition of such property.
(k)
Curative Allocations.
(i)
The special allocations required under this Paragraph 5.2 (other
than this Paragraph 5.2(k)) are intended to comply with the Treasury Regulations.
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It is the intent of the Company that all special allocations made pursuant to
Paragraph 5.2(a) through Paragraph 5.2(j) shall be offset either with other special
allocations made pursuant to Paragraph 5.2(a) through Paragraph 5.2(j) or with
special allocations of other items of Company income, gain, loss or deduction
pursuant to this Paragraph 5.2(k). Therefore, the Managers may, in their sole
discretion, make, pursuant to this Paragraph 5.2(k), such offsetting special
allocations of Company income, gain, loss or deduction in any manner the
Managers and the Company's tax advisors determine to be appropriate, consistent
with the goal that each Member's Capital Account balance be, to the extent
possible, equal to the Capital Account balance such Member would have had in
the absence of any allocations pursuant to Paragraph 5.2(a) through Paragraph
5.2(j).
(ii)
The Members expect and intend that upon the liquidation of the
Company, after giving effect to all contributions and all allocations for all periods,
each Member's Capital Account will have a positive balance equal to the amount
of proceeds distributable to such Member. If in the opinion of the Managers and
the Company's tax advisors this intended result would not be achieved without
modification of the allocations required under this Article V, then the allocations
required under this Article V shall be modified in a manner consistent with
Treasury Regulations § 1.704-1(b) and §1.704-2 to the extent necessary to cause
each Member's Capital Account to have a balance equal to the amount of
proceeds distributable to such Member upon the liquidation of the Company.
(iii)
If the Managers and the Company's tax advisors determine that
the allocation of any item of Company income, gain, loss, deduction or credit is
not specified in this Article V (an "unallocated item"), or that the allocation of any
item of Company income, gain, loss, deduction or credit under this Article V is
clearly inconsistent with the Members' economic interests in the Company
(determined by reference to the general principles of Treasury Regulations §
1.704-1(b) and the factors set forth in Treasury Regulations § 1.704-1(b)(3)(ii) (a
"misallocated item"), then the Managers may allocate such unallocated item, or
reallocate such misallocated item, to reflect the Members' economic interests in the
Company.
5.3
Other Allocation Rules.
(a)
Company Profits, Company Losses, and all other items of Company
income, gain, loss, deduction and credit shall be determined by the Managers on a daily,
monthly or other basis, using any method permitted under Code § 706 and the Treasury
Regulations.
(b)
Company Profits and Company Losses allocable to Preferred Members
shall be allocated pro rata based upon each Preferred Member's Preferred Share and
Company Profits and Losses allocable to Common Members shall be allocated pro rata
based upon each Common Member's Common Share.
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(c)
The Members are aware of the tax consequences of the allocations
required under this Article V and each Member hereby agrees to be bound by the
provisions of this Article V in reporting such Member's share of Company income, gain,
loss and deduction for federal income tax purposes.
(d)
Solely for purposes of determining a Member's proportionate share of the
"excess nonrecourse liabilities" of the Company (within the meaning of Treasury
Regulations §1.752-3(a)(3)), the Members' interests in Company profits are in proportion
to their Percentage Interests.
(e)
As between a Member and any permitted (under this Agreement)
transferee of all or any portion of such Member's Interest, Company Profits and Company
Losses shall be allocated by the Managers in a manner intended to comply with § 706 and
the Treasury Regulations promulgated thereunder. In order to make such an allocation, the
Managers may, in their discretion, close the Company's books on the date of such
permitted transfer.
5.4
Allocations Solely For Tax Purposes.
(a)
Allocations required under this Paragraph 5.4 are solely for tax purposes
and shall not affect any Member's Capital Account or any Member's share of any
distribution from the Company.
(b)
Allocations of tax credits, tax credit recapture, tax benefit recapture, and
any items related thereto shall be allocated to the Members according to their interests in
such items as determined by the Managers taking into account the principles of Treasury
Regulations § 1.704-1(b)(4)(ii).
(c)
Items of Company income, gain, loss and deduction with respect to any
property contributed to the capital of the Company shall be allocated among the
Members in accordance with Code § 704(c) so as to take account of any variance
between the tax basis of such property to the Company and its Book Value.
(d)
If the Book Value of any Company property is adjusted pursuant to
Paragraph 4.2(b), subsequent allocations of items of taxable income, gain, loss and
deduction with respect to such Company property shall take account of any variation
between the tax basis of such Company property and its Book Value in the same manner
as required under Code § 704(c).
ARTICLE VI
DISTRIBUTIONS AND DISTRIBUTABLE CASH
6.1
Timing and Amount.
(a)
Distributions to Preferred Members. The Managers shall, to the extent of
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available Distributable Cash, distribute annually the amount of one hundred thousand
dollars ($100,000) to the Preferred Members (the "Preferred Payment"). To the extent
possible, such distribution shall be made on a quarterly basis. To the extent the Company
does not, in the discretion of the Managers, have the ability to make a quarterly payment
when due, such amount shall be paid by the Managers out of the next available funds.
(b)
Distributions to Common Members. Within sixty (60) days after the end
of each Fiscal Year, the Managers shall determine the amount of Distributable Cash, if
any, available for distribution to the Common Members. All distributions of cash in
respect to Interests, if made, shall be made to all Common Members pro rata on the basis
of the number of Common Interests held by each Common Member. The Managers may,
but are not required to, make distributions more frequently based on estimates of
Distributable Cash then available.
6.2
Distributions upon Liquidation or Sale. Upon a liquidation of the Company or a
sale of all or substantially all of the properties and assets of the Company, the Distributable
Cash attributed to such sale shall be distributed as follows:
(a)
First, there shall be a distribution to the Preferred Members of an amount
equal to the sum of any accrued but unpaid Preferred Payment plus the Value of their
Capital Contribution as set forth on Schedule 1 attached hereto, increased by any other
capital contributions made by the Preferred Members.
(b)
The balance, if any, of all distributions in respect of Interests shall be
made to the Common Members pro rata on the basis of the number of Common Interests
held by such Common Members, subject to such adjustments as are necessary to reflect
the priorities and limitations of any Common Interests issued as profits interests as
consideration for services including those Common Interests issued to the Managers
following any redemption.
6.3
Limitations on Distributions. Notwithstanding any provision to the contrary
contained in this Agreement, the Company shall not make any distribution to any Member if such
distribution would violate the Act or other comparable applicable law or if such distribution is
prohibited in any loan agreements for borrowed money between the Company and its lenders.
6.4
Distributions in Respect of lllinois Replacement Tax Savings. An amount equal to
the Company's Illinois Replacement Tax Savings for any Fiscal Year shall be distributed to the
Members that are themselves subject to the Illinois Replacement Tax for such Fiscal Year, and
such distribution shall be made to and among such Members in proportion to the amount of
Company Profits allocated to such Members for such Fiscal Year.
6.5
Distributions in Respect of Members' Income Tax. To the extent Distributable
Cash is available after the payment of the Preferred Payment provided in Paragraph 6.1(a) above
for such year, on or before the 75th day following the close of each calendar year the Company
shall distribute to each Common Member cash in the amount equal to the Tax Percentage
multiplied by the excess, if any, of (a) the amount of Company Profits or other items of Company
2 - 46
income or gain, if any, allocated to such Common Member pursuant to Paragraph 5.1(b)(iii),
Paragraph 5.1(b)(iv) and/or Paragraph 5.2(i) for the Company's Fiscal Year which ended within
such closed calendar year, over (b) the amount of Company Losses or other items of Company
loss or deduction allocated to such Common Member pursuant to Paragraph 5.1(a)(i) and/or
Paragraph 5.2(i) for the Company's Fiscal Year that ended within such closed calendar year.
ARTICLE VII
VOTING RIGHTS AND MEETINGS
7.1
Vote per Member. Except as otherwise stated in this Agreement or required under
the Act, Preferred Members shall not have any voting rights and Common Members shall have
voting rights only with respect to matters that the Managers properly submit to a vote by the
Common Members. Except as otherwise stated in this Agreement or required under the Act, with
respect to matters that are properly submitted to a vote by the Common Members, all Common
Members shall be entitled to vote on such matters in the same proportion as the amount of
Common Interests held by each Common Member bears to the total amount of Common
Interests outstanding.
7.2
Designation of Member Representatives.
(a)
Each Member that is an entity, as opposed to a natural person, shall
designate a natural person to act as the Member Representative of such Member in all
actions with regard to the Company. The initial Member Representative of Bob shall be
Bob Smith, the initial Member Representative of Larry shall be Larry Smith, and the
initial Member Representative of Fred shall be Fred Smith. Any and all actions taken by
such Member Representative on behalf of the Member shall be conclusive and binding
for all purposes hereunder. Each Member shall have the ability at any time and from time
to time to change the identity of its Member Representative by the delivery of written
notice of such change to all Members and their Member Representatives. Such change
shall be effective only upon the receipt of actual notice of such change and the Company
and the other Members shall be protected in relying on the authority of any Member
Representative until the receipt of notice of such change.
(b)
The rules for the management of the Company are set forth in Article
VIII below. The three initial Managers shall be Bob, Larry and Fred (sometimes referred
to collectively as the "Initial Managers" or individually as an "Initial Manager").
(c)
If there is a vacancy in the office of Manager, whether through the
creation of the role of an additional Manager or the death, retirement, withdrawal,
resignation or cessation of existence of an acting Manager, such vacancy shall be filled
through the Majority Vote of the Common Members.
7.3
Meetings of the Members Except as otherwise stated in this Agreement or
required under the Act, the following provisions shall apply to all meetings of Members:
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(a)
Meetings of Members, on a reasonable basis, may be called at any time,
and for any purpose, by the Managers.
(b)
Meetings of Members shall be conducted during regular business hours at
the principal executive office of the Company, or at any other time and place designated
by the Manager.
(c)
Members entitled to vote at any meeting may vote in person or by proxy
at such meeting. Whenever a vote, consent or approval of Members is permitted or
required under this Agreement, such vote, consent or approval may be given at a meeting
of Members or by written consent.
(d)
Each Member may authorize any Person to act for such Member by proxy
on all matters on which such Member is entitled to act, including waiving notice of any
meeting or voting or participating at a meeting. Every proxy must be signed by the
Member or its attorney-in-fact and shall be revocable at the pleasure of the Member
executing it at any time before it is voted.
(e)
Each meeting of Members shall be conducted by the Manager or by such
Person that the Manager may designate.
(f)
With respect to every meeting of Members called pursuant to Paragraph
7.3(a), the Manager shall mail to the Preferred Member and to each Common Member
entitled to vote at such meeting, at least seven calendar days before such meeting, written
notice plainly identifying the place, date and time of such meeting.
(g)
For the purpose of determining which Members are entitled to receive any
distribution or notice, or to vote at any meeting of Members or any adjournment thereof, the
date on which the resolution declaring such distribution is adopted, and the date on which
such notice of meeting or other notice is mailed, as the case may be, shall be the record date
for making such determination.
(h)
Whenever any notice is required to be given to any Member, a waiver
thereof signed by such Member shall have the same effect as the giving of timely and proper
notice (regardless of whether such Member signs the waiver before, at, or after the time the
notice is required to be given).
(i)
With respect to every meeting of Members called, the Manager shall
maintain a record of all actions taken by the Members pursuant to any provision of this
Agreement at each meeting, including minutes of each meeting and copies of all proxies
pursuant to which any vote is executed. The Manager shall also maintain copies of all
actions taken by consent of Members and copies of all proxies pursuant to which any
consent is executed.
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ARTICLE VIII
MANAGEMENT
8.1
Management of the Company. The initial number of Managers of the Company
shall be three. Except as elsewhere provided herein, the Managers shall act by majority vote.
Except as otherwise stated in this Agreement or required under the Act, the business and affairs of
the Company shall be conducted, directed, managed and controlled, and all actions required under
this Agreement shall be determined solely and exclusively by the Managers; and the Managers
shall have all rights and powers and authority on behalf and in the name of the Company to
perform all acts necessary and desirable to the objects and purposes of the Company. Without
limiting the generality of the foregoing, the Managers, in their capacity as such, shall have the
right and power and authority, except as otherwise stated in this Agreement or required under the
Act, on behalf of the Company to:
(a)
authorize, execute and engage in contracts, transactions, investments and
dealings on behalf of the Company, including contracts, transactions, investments and
dealings with any Member or any Manager including the sale or exchange of all or any
assets of the Company;
(b)
borrow money on behalf of the Company and mortgage, pledge or
otherwise encumber any assets of the Company;
(c)
collect all amounts due to the Company;
(d)
call meetings of Members;
(e)
issue Interests in accordance with the restrictions of this Agreement,
including the issuance of Interests to employees of the Company, in consideration of
services performed and to be performed, subject to such vesting provisions, priorities,
including limitations on sharing in proceeds of liquidation or sale, or other requirements or
conditions as determined by the Managers;
(f)
pay all expenses incurred in forming the Company;
(g)
lend money;
(h)
determine and make distributions, in cash or otherwise, in respect of
Interests, in accordance with the provisions of this Agreement and the Act;
(i)
establish a record date with respect to all actions to be taken hereunder
that require a record date to be established;
(j)
establish or set aside any reserve or reserves for contingencies and for any
other proper Company purpose;
(k)
redeem, repurchase or exchange, on behalf of the Company, Interests that
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may be so redeemed, repurchased or exchanged;
(1)
appoint (and dismiss from appointment) attorneys and agents on behalf of
the Company, and employ or otherwise engage (and dismiss from employment or other
engagement) any and all persons providing legal, accounting or financial services to the
Company, and such employees, consultants, independent contractors, or agents as the
Managers deem necessary or desirable for the management and operation of the Company,
including, without limitation, any Member;
(m)
incur and pay all expenses and obligations incident to the operation and
management of the Company, including, without limitation, the services referred to in the
preceding paragraph, taxes, interest, travel, rent, insurance, supplies, and salaries and
wages of the Company's employees and agents, including compensation to service
providers who are also Members, provided, however, that any adjustment in the
compensation of Members who are also Managers must be justified, as determined by the
Managers, based on the relative contribution of each Manager on behalf of the Company
and the financial strength or success of the operations of the Company, and must by agreed
upon unanimously by all Managers then acting;
(n)
acquire and enter into any contract of insurance necessary or desirable for
the protection or conservation of the Company and its assets or otherwise in the interest of
the Company as the Managers shall determine;
(o)
open accounts and deposit, maintain and withdraw funds in the name of
the Company in banks, savings and loan associations, brokerage firms or other financial
institutions;
(p)
effect a dissolution of the Company and act as liquidating trustee or the
Person winding up the Company's affairs, all in accordance with the provisions of this
Agreement and the Act;
(q)
bring, defend, arbitrate, prosecute or compromise on behalf of the
Company actions and proceedings at law or equity before any court or governmental,
administrative or other regulatory agency, body or commission or otherwise;
(r)
prepare and cause to be prepared reports, statements and other relevant
information for distribution to Members as may be required or determined to be necessary
or desirable by the Managers from time to time;
(s)
prepare and file all necessary returns and statements and pay all taxes,
charges, assessments and other impositions applicable with respect to the Company or its
income or assets;
(t)
delegate to any Person or committees of Persons any right, power,
authority and/or duty of the Managers;
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(u)
prosecute, protest, defend and/or protect all proprietary rights (including
all trade names, trademarks and service marks, and all licenses and permits and
applications with respect thereto) of the Company and all rights of the Company in
connection therewith;
(v)
execute and deliver, for and on behalf of the Company, promissory notes,
evidences of indebtedness, agreements, assignments, deeds, leases, loan agreements,
mortgages and other security instruments, in each case as the Managers deem necessary or
appropriate for the objects and purposes of the Company; and
(w)
execute all other documents or instruments, perform all duties and powers
and do all things for and on behalf of the Company in all matters necessary or desirable
or incidental to the foregoing.
The express grant of any power or authority in this Agreement to the Managers shall not in
any way limit or exclude any other power or authority of the Managers that is not specifically or
expressly set forth in this Agreement.
8.2
Management Actions Requiring Unanimous Consent. The unanimous written
consent of all Members is required: (i) to sell, transfer, exchange, dispose of, or abandon, in any
single transaction or related series of transactions, Company property or assets having a net value
in excess of thirty (30)% of the aggregate net value of all Company properties and assets; (ii) to
merge or consolidate the Company with or into any other limited liability company or any
corporation, partnership or other entity; (iii) to refinance any loan of the Company in excess of one
million dollars ($1,000,000) in replacement of any nonrecourse financing; (iv) to change the
purposes for which the property of the Company is held; (v) to incur debt in excess of ordinary
working capital amounts at any time after all the secured debt of the Company has been replaced
with nonrecourse financing; and (vi) to raise additional capital other than as permitted under
Paragraph 4.1.
8.3
Reliance by Third Parties. Persons dealing with the Company are entitled to rely
conclusively upon any grant of any power or authority to the Managers under this Agreement.
8.4
No Management by Members Not Managers. Except as otherwise stated in this
Agreement or required under the Act, no Member other than a Manager shall take part in the dayto-day management, operation or control of the business or affairs of the Company, and no
Member other than a Manager 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.
8.5
Business Transactions of a Manager with the Company. Except as otherwise
stated in this Agreement or required under the Act, the Managers may lend money to, borrow
money from, act as surety, guarantor or endorser for, guarantee or assume one or more
obligations of, provide collateral for, and transact other business with the Company and (subject
to applicable law) shall have the same rights and obligations with respect to any such matter as a
Person who is not a Manager.
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8.6
Tenure of Managers. Each Manager shall retain his or her status and capacity as
a Manager until he or she ceases to be a Member of the Company or is removed or resigns as a
Member, in accordance with the provisions of this Agreement and the Act.
8.7 Exculpation from Liability for Certain Acts. No Manager shall be liable to the
Company or to any other Members for damages attributable to any breach of duty owed by such
Manager (by virtue of being a Manager) to the Company or the other Members, except to the
extent (i) required under the Act or (ii) such breach of duty is based upon a knowing violation of
applicable law or this Agreement or (iii) such breach of duty is based upon violation of applicable
law or this Agreement arising out of such Member's gross negligence or willful misconduct. No
Manager shall be liable to the Company or any other Member for any loss, damage or claim
incurred by reason of any act or omission performed or omitted by such Manager in good faith on
behalf of the Company and in a manner reasonably believed to be within the scope of authority
conferred on such Manager by this Agreement. A Manager 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 as to matters the Manager reasonably
believes are within such other Person's professional or expert competence and who 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 Members might
properly be paid.
8.8
Indemnification of Managers. The Company hereby agrees to indemnify and
defend each Manager against and hold each Manager harmless from any losses, judgments,
liabilities and expenses (including reasonable attorneys’ fees) incurred by such Manager by reason
of any act or omission (other than any act or omission carried out in willful misconduct or gross
negligence) performed or omitted in good faith on behalf of the Company and in a manner
reasonably believed by such Manager to be within the scope of the authority of such Manager.
8.9
Resignation and Withdrawal. Any Manager may resign from the position of
Manager at any time by giving written notice to the Members of the Company and any other then
acting Manager. The resigning Manager shall cease to be a Manager upon receipt of the notice of
such resignation by any other Manager or, if later, at such time as maybe specified in such notice.
Upon the Withdrawal of any Manager, such Manager shall be treated as having resigned as of the
date of Withdrawal and shall automatically cease to be a Manager as of the date of such
Withdrawal. Except in the case of resignation by reason of Withdrawal, the resignation of a
Manager pursuant to this Paragraph 8.9 shall not affect such Member's rights as a Member and shall
not constitute a Withdrawal of such Member.
8.10 Property Management. The Members agree and consent that Larry shall be the
initial manager of the property owned by the Company. Larry agrees and consents that it will serve
in this capacity, with responsibility for day-to-day tenant relations, without charge, until the
Managers retain an independent management company or with the consent of all of the Members,
agree on the terms and conditions under which Larry will be compensated for such services. In
performing such services, all expenditures other than expenditures on an emergency basis up to five
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thousand dollars ($5,000) for a single event must be subject to the approval of Bob, and if so
requested, must be subject to a competitive bid process.
8.11 Leasing and Sale Brokerage. An affiliate of Larry shall be entitled to leasing
commissions with regard to leasing activity at the property of the Company and a sales commission
upon the disposition of the property by the Company. Such affiliate shall be entitled to share
standard commissions on a negotiated basis with outside brokers, and if it is the sole broker on
any leasing or sales transaction, shall limit its commission to one half of the standard commission.
8.12 Compensation of Managers. Unless and until revised by the unanimous vote of all
of the Members, the Managers, in their capacity as Managers, shall be entitled to annual
compensation in the amount of $_______, and shall also be reimbursed for all reasonableexpenses
incurred on behalf of the Company.
8.13 Other Businesses. Each Member agrees and acknowledges that the business of the
Company is not the primary or sole business of any Member, and each Member is permitted to
engage in any other business, without offering rights of participation to the Company or any
Member, even if such business may be deemed to be competitive with the business of the Company.
NOTE: Depending on the nature of the business, certain non-competition provisions may be in
order.
ARTICLE IX
LIMITATIONS ON DISPOSITION OF MEMBERS' INTERESTS
Alternative A
9.1
Basic Limitations. Except as otherwise provided in this Article IX, no Member may
sell, assign, give, hypothecate, pledge, transfer, or otherwise dispose of that Member's Interest in the
Company, in whole or in part, voluntarily, involuntarily, by operation of law, or otherwise (a
"Transfer"), to any Person other than the Company. No Member shall dissociate from the Company
prior to its dissolution and winding up.
9.2
Investment Representations and Warranties. Each Member hereby represents and
warrants to the Company that its acquisition of its Interest is made as principal for its own account,
for investment purposes only, and not with a view to the resale or distribution of such Interest. Each
Member agrees that it will not sell, assign, give, hypothecate, pledge, transfer, or otherwise dispose
of any or all of its Interest to any Person who or which does not similarly represent and warrant
and agree as provided in this Paragraph 9.2.
9.3
Restrictions on Transfer of Interests.
(a)
Voluntary Transfer. If a Member intends to Transfer any Interests it owns to
any Person other than the Company (a "Transferor"), it shall give written notice to the
Company and the nonselling Members ("Remaining Members") of its intention to do so
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2
("Transfer Notice"). The Transfer Notice, in addition to stating the Transferor's intention to
Transfer its Interests, shall state: (i) the number of Interests it desires to Transfer; (ii) the
name, business and residence address of the proposed transferee; and (iii) whether or not
the Transfer is made at arm's length for full and valuable consideration and, if so, the
amount of the consideration and the other terms of the sale. For sixty (60) days following
the Company's receipt of the Transfer Notice (the "Company Option Period"), the
Company shall have the option to purchase all or any portion of the Interests that are
proposed to be transferred for the price and upon the terms set forth in Paragraph 9.3(i), and
if the Company does not exercise its option to purchase all, but not less than all, of such
Interests within said sixty (60) day period, the Remaining Members for a period of fifteen
(15) days after the expiration of the Company Option Period shall have an option to purchase
all of the Interests that have not been purchased by the Company, at the price and upon the
terms set forth in Paragraph 9.3(i).
(b)
Involuntary Transfers. In the event of the death, incompetency, bankruptcy,
withdrawal or dissolution of a Member (a "Withdrawing Member" or a Transferor), (i) for
a period of ninety (90) days after the Company receives actual notice thereof, the
Company shall have the option to purchase all of any portion of the Withdrawing
Member's Interest, for the price and upon the terms set forth in Paragraph 9.3(i). If the
Company does not exercise its option to purchase all of the Withdrawing Member's
Interest, for a period ending fifteen (15) days after the close of the Company's ninety (90)
day option period, the Remaining Members shall have an option to purchase all, but not
less than all, of such Withdrawing Member's Interest at the price set forth in Paragraph
9.3(i)(i)(2) and upon the same terms as provided for an option regarding a voluntary
transfer in Paragraph 9.3(a) of this Operating Agreement. Notwithstanding the foregoing,
neither the Company nor the Remaining Members may exercise this option unless the
Remaining Members have agreed pursuant to Paragraph 10.1(a) to continue the
Company's business with a new Member. If the Company and the Remaining Members do
not exercise their options, the provision of Paragraphs 9.3(e) and (g) shall apply to the
Withdrawing Member and its Representative, if any.
(c)
Exercise of Options.
(i)
Means of Exercise. The Company and the Remaining Members
who exercise any option granted by this Article IX shall do so by giving written
notice ("Exercise Notice") of the exercise of their respective options within the
time periods provided in this Article IX to the Members and, in the case of an
option upon involuntary transfer, to the Withdrawing Member or its
Representative.
(ii)
Voting to Exercise. A Transferor, in his or her capacity as a
Member, shall not be entitled to vote in the Company's determination of whether to
exercise any purchase option granted by this Operating Agreement or with respect
to any decisions or actions involving the purchase option or the consummation of
the exercise thereof.
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2
(d)
Nonexercise of Options. If the Remaining Members and the Company fail
to exercise their purchase options to acquire all of the Interests that are proposed to be
transferred in compliance with Paragraph 9.3(a) of this Operating Agreement, the
Transferor may, within thirty (30) days following the expiration of the option period for the
Remaining Members, transfer the Interests to the transferee named in the Transfer Notice,
subject to the terms of this Operating Agreement; provided, however, that such Transfer
must be upon the terms and for the consideration specified in said Transfer Notice. If the
Transfer is not upon the terms or is not to the transferee stated in the Transfer Notice, or is
not made within said thirty (30) day period, or if the Transferor, after the Transfer,
reacquires all or any portion of the transferred Interests, the initial Transfer shall be void
and without legal or other effect.
(e)
Requirements for Transfer. Subject to any restrictions on transferability
required by law (including the Securities Act of 1933, any state securities or "Blue Sky"
law, and the rules promulgated thereunder), and subject to the provision of this Article IX,
each Member shall have the right to Transfer (but not to substitute the assignee as a
substitute Member in his or her place, except in accordance with Paragraph 9.3(g)
hereof), by written instrument, the whole or any part of his or her Interest, provided that: (i)
the transferee is a citizen and resident of the United States, and otherwise not a tax-exempt
entity under Code §168(h); (ii) the Transferor delivers to the Company and the Remaining
Members an unqualified opinion of counsel in form and substance satisfactory to counsel
designated by the Managers that neither the Transfer nor any offering in connection
therewith violates any provision of any federal or state securities law; (iii) the transferee
executes a statement that he or she is acquiring such Interest or such part thereof for his or
her own account for investment and not with a view to distribution, fractionalization or
resale thereof; and (iv) the Company receives a favorable opinion of the Company's legal
counsel or such other counsel selected by the Managers that such Transfer would not
result in the termination of the Company (within the meaning of Code §708(b)) or the
termination of its status as a limited liability company under the Code; provided, further,
that the Managers may elect to waive the requirement of the opinions of counsel set forth
in Paragraphs 9.3(e)(ii) and 9.3(e)(iv) above should they, in their sole discretion,
determine that the cost of time delays involved in procuring such opinions may impede the
Company's ability to effect the contemplated Transfer.
(f)
Effectiveness of Assignment. No Transfer shall be effective unless and
until the requirements of Paragraph 9.3(e) are satisfied. The Transfer by a Member of all
or part of his or her Interest shall become effective on the first day of the calendar month
immediately succeeding the month in which all of the requirements of this Paragraph 9.3
have been met and the Company has received from the Transferor a transfer fee sufficient
to cover all expenses of the Company connected with such transfer; provided, however,
that the Managers may elect to waive this fee in their sole discretion. All distributions
prior to the effective date shall be made to the Transferor and all distributions made
thereafter shall be made to the transferee.
(g)
Requirements for Admission. No transferee of the whole or a portion of a
Member's Interest shall have the right to become a Member unless and until all of the
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2
following conditions are satisfied:
(i)
A duly executed and acknowledge written instrument of transfer
approved by the Remaining Members has been filed with the Company setting
forth (A) the intention of the transferee to be admitted as a Member; (B) the
notice address of the transferee; and (C) the number of Interests transferred by the
Transferor to the transferee;
(ii)
The opinions of counsel described in Paragraph 9.3(e) above are
delivered to the Company and the Remaining Members subject to the Managers'
right to waive the delivery of these opinions in their sole discretion;
(iii)
The Transferor and the transferee execute and acknowledge, and
cause any necessary other Persons to execute and acknowledge, such other
instruments and provide such other evidence as the Managers may reasonably
deem necessary or desirable to effect such admission, including without
limitation: (A) the written acceptance and adoption by the transferee of the
provisions of this Operating Agreement including a representation and warranty
that the representations and warranties in Paragraph 9.2 are true and correct with
respect to the transferee; (B) the transferee's completion of a purchaser
qualification questionnaire that will enable counsel for the Company to
determine whether such proposed substitution is consistent with the requirements
of a private placement exemption from registration under the Securities Act of
1933 and relevant state law; and (C) the transferee's completion, if applicable, of
an acknowledgment of the use of a purchaser representative, and such
representative's completion of a purchaser representative questionnaire that will
enable counsel for the Company to determine whether such proposed substitution
is consistent with the requirements of a private placement exemption from
registration under the Securities Act of 1933 and relevant state law;
(iv)
The admission is approved by the Managers, with the granting or
denial of the admission to be within the sole and absolute discretion of the
Managers; and
(v)
A transfer fee has been paid to the Company by the Transferor
sufficient to cover all expenses in connection with the transfer and admission,
including but not limited to attorneys’ fees for the legal opinions referred to in
Paragraphs 9.3(e) and 9.3(g), subject to the Managers' right to waive the payment
of these fees in their sole discretion.
(h)
Rights of Mere Assignee. If a transferee of an Interest is not admitted as a
Member, such transferee, also known as an Economic Interest Owner, he or she shall be
entitled to receive the allocations and distributions attributable to the transferred Interest,
but such transferee shall not be entitled to inspect the Company's books and records,
receive an accounting of Company financial affairs, exercise the voting rights of a
member, or otherwise take part in the Company's business or exercise the rights of a
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Member under this Agreement.
(i)
Purchase Price and Terms.
(i)
Purchase Price. If the Company or the Remaining
Members exercise their options (the "Optionor"), the purchase price the
Optionor shall pay for the Transferor's Membership Interest following the
exercise of an option to purchase under Paragraph 9.3(a) or (b) shall be an
amount equal to: (1) the purchase price as stated in the Transfer Notice
where (a) the proposed transfer is for full and adequate consideration and
(b) the transferee identified in the Transfer Notice is not a member of the
Transferor's family or an affiliate of the Transferor; and (2) in all other
cases, the value of the Transferor's Membership Interest as mutually
agreed upon by the Members. If the parties cannot agree within ten (10)
days after the date of the final Exercise Notice, the purchase price shall be
the amount the Transferor would receive if all the Company Property were
sold at its appraised fair market value and the proceeds were applied in
accordance with Paragraph 10.2. An independent appraiser ("Qualified
Appraiser") experienced in conducting appraisals of assets similar to the
Company property shall conduct an appraisal of all of the Company
property to determine its fair market value ("First Appraisal"). The
Optionor shall select a Qualified Appraiser to perform the First Appraisal
and shall assume the cost of the First Appraisal. If, within five (5) days
after receipt of the First Appraisal, the Transferor disputes the value
determined by the First Appraisal, the Transferor may obtain, at his or her
own cost, a second appraisal ("Second Appraisal") of the fair market
value of the Company property by a Qualified Appraiser of his or her
choice. If the parties agree, the Second Appraisal shall be used to
determine the value of the Company property. If the two appraisals are
performed and the parties cannot agree within ten (10) days which of the
appraisals accurately reflects the value of the Company property, the two
appraisers selected under this subparagraph shall select a Qualified
Appraiser to conduct a third appraisal ("Third Appraisal") of the fair
market value of the Company property. The fair market value of the
Company property established by the Third Appraisal shall be final and
binding in all respects on all parties. The Optionor and the Transferor
shall each pay fifty (50%) percent of the costs of the Third Appraisal.
(ii)
Payment of Purchase Price and Closing. The closing of
any sale and purchase of the Transferor's Interest in the Company shall be
within thirty (30) days from the later of (1) the date of the final Exercise
Notice; or (2) delivery of the final appraisal performed pursuant to
Paragraph 9.3(i)(i). The Optionor shall pay the purchase price: (1) at the
time and in accordance with the terms and conditions as stated in the
Transfer Notice, when the purchase price is determined pursuant to
Paragraph 9.3(i)(i); or (2) at the closing in all other cases, unless the
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parties agree on different terms. The Transferor shall deliver documents
satisfactory to the Optionor conveying his or her Interest free and clear of all
liens, claims and encumbrances, any of which may be paid out of the
purchase price, with the remainder, if any, paid to the Transferor. If the
purchase price is insufficient to satisfy any such liens, the Transferor shall
discharge the balance.
9.4
Interests in Member. A Member that is not a natural person may not cause or
permit an ownership interest, direct or indirect, in itself to be disposed of such that, after the
disposition: (a) the Company would be considered to have terminated within the meaning of
Code §708; or (b) without the written consent of the other Members that Member shall cease to
be controlled by substantially the same Persons who control it as of the date of the Member's
admission to the Company. For a period of one hundred twenty (120) days after notice to the
Company of any Member's breach of the provisions of clause (b) of the immediately preceding
sentence, the Company shall have the option to buy, and on exercise of that option the breaching
Member shall sell, the breaching Member's Membership Interest, at the price determined in
accordance with Paragraph 9.3(i)(i)(2). The breaching Member shall deliver documents
satisfactory to the Company conveying its Interest free and clear of all liens, claims and
encumbrances, any of which may be paid out of the purchase price, with the remainder, if any,
paid to the selling Member. If the purchase price is insufficient to satisfy any such liens, the selling
Member shall discharge the balance.
9.5
Put-Call Arrangement. In the event of an Impasse, each Member shall have the
right to make an optional "put-call" offer to the other Members to purchase the other Members'
entire Interest. Notwithstanding the above, no Member may initiate a put-call when there is an
outstanding Offer (defined below) pending. The Member initiating a put-call shall be referred to
as the "Offeror" and the other Member shall be referred to as the "Offeree." For purposes hereof,
an Impasse shall mean the failure of all Members to agree on any decision proposed by the
Managers under Paragraph 8.2 above within twenty (20) days after receipt of such proposal.
(a)
Terms of Offer.
(i)
Written Offer. Upon the terms described in this Paragraph 9.5, the
Offeror may submit to the Offeree a written offer ("Offer") to purchase all the
Interests then owned by the Offeree.
(ii)
Aggregate Asset Price. The Offer shall state the aggregate price at
which the Offeror would be willing to purchase all the Company Property
("Aggregate Asset Price"); provided, however, that such Aggregate Asset Price
shall be at least equal to or greater than the amount necessary (i) to repay all
outstanding Company liabilities (including accrued interest), including but not
limited to all outstanding loans by Members to the Company and (ii) to return to
each Member its aggregate unreturned Capital Contributions.
(iii) Price. The "Price" for the Offeree's Interest shall be the amount
the Offeree would receive if all the Company Property were sold for the
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2
Aggregate Asset Price and the proceeds were applied in accordance with
Paragraph 10.2.
(iv)
Release from Recourse Obligations. If, at the time an Offer is
made, the Offeree or any of its affiliates are personally liable under any
guaranties or other financial undertakings for the repayment or performance of
all or part of any third-party loan made to the Company ("Offeree's Recourse
Liability"), then the Offer must include the Offeror's written agreement to use its
best efforts to obtain the release of Offeree's Recourse Liability and, if required by
the holders of the Offeree's Recourse Liability, to substitute acceptable
guaranties, letters of credit or other financial undertakings in exchange for such
release of Offeree's Recourse Liability. If any lender will not agree to release the
Offeree's Recourse Liability, then the Offeror shall protect, defend, indemnify and
hold such Offeree and its Affiliates, officers, directors, agents, shareholders,
partners, beneficiaries and trustees harmless from any manner of loss, claim,
damage or expense arising out of or relating to the Offeree's Recourse Liability
from and after the Closing Date.
(b)
Acceptance or Rejection of Offer. The Offeree shall either accept or reject the
Offer, which acceptance or rejection shall be in writing and delivered to the Offeror on or
before 10:00 a.m. on the thirtieth (30th) calendar day after the Offer is delivered. If the
Offeree fails to either accept or reject the Offer on a timely basis, it shall be deemed to
have consented to the unagreed action that precipitated the Impasse.
(i)
Acceptance. If the Offeree accepts the Offer, the Offeror shall be
deemed the "Buyer" and the Offeree shall be deemed the "Seller." The Put-Call
Closing shall take place pursuant to Paragraph 9.5(c) below. Effective immediately
upon the delivery to the Offeror of the Offeree's acceptance of the Offer, the
Offeror's obligations under the Offer and this Article IX shall become recourse,
absolute, unconditional and irrevocable obligations and shall not be subject to any
terms or conditions other than the default of the Offeree under the Offer.
(ii)
Rejection of Offer. If the Offeree rejects the Offer, the Offeree
shall thereafter be deemed the "Buyer" and the Offeror shall be deemed the
"Seller." The closing of the transaction described in the Offer shall take place on
the Closing Date pursuant to Paragraph 9.5(c) below. If the Offeree properly
rejects the Offer, it shall proceed to purchase from the Offeror, and the Offeror
shall sell to the Offeree, the entire Interest owned by the Offeror for a Price equal
to the amount the Offeror would receive if all the Company Property were sold for
the Aggregate Asset Price and the proceeds were applied in accordance with
Paragraph 10.2.
(c)
Put-Call Closing Procedure. The transaction described in the Offer shall
close on the earlier of (i) the sixtieth (60th) day after the date the Offer is either accepted
or rejected by the Offeree, or (ii) such earlier date as the Buyer may elect with ten (10)
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days’ prior written notice to the Seller ("Put-Call Closing" or "Closing Date"). At the
Put-Call Closing, the following shall occur:
(i)
The Buyer shall pay to the Seller, in immediately available funds, a
sum equal to the Price.
(ii)
The Seller shall deliver to the Buyer a complete and absolute
assignment of one hundred percent (100%) of the Seller's Interest ("Assignment").
(iii)
The Buyer shall satisfy its obligation under Paragraph 9.5(a)(iv)
above.
(iv)
The Seller shall cause its affiliates to terminate any agreements
with the Company as instructed by the Buyer in its sole and absolute discretion,
effective from and after the Closing Date, provided that any such affiliate shall be
paid in full on the Closing Date for all services rendered prior to such termination.
(v)
The Buyer and the Seller shall each deliver to the other a release
("Mutual Release") of the other from all acts and conduct of the other relating to the
Company or its affairs occurring or performed during the term of this Operating
Agreement, except that neither the Buyer nor the Seller shall be released from any
actions (or failures to act) in violation of this Operating Agreement or from any
grossly negligent, reckless or intentionally wrongful acts or omissions. From and
after delivery of the Assignment, the Seller shall have no rights or obligations
under this Operating Agreement with respect to the management and operation of
the Company Property, or otherwise.
(d)
Failure to Perform.
(i)
Buyer's Failure to Perform. If the Buyer fails to perform as
required under Paragraph 9.5(c), then the Seller shall have the option, exercisable
within sixty (60) days after the original Closing Date, to (i) pursue the Buyer for
specific performance of its obligations as Buyer; or (ii) continue the Company as
if no put-call procedure had been implemented except that the Buyer shall be
deemed to have consented to the unagreed action that precipitated the Impasse; or
(iii) become the Buyer under the defaulted Offer, subject to the same terms and
conditions set forth in the Offer with the exceptions that: (1) the Price shall be
eighty percent (80%) of the amount which the defaulting party would receive if
all the Company property were sold for the Aggregate Asset Price and the
proceeds were applied in accordance with Paragraph 10.2, and (2) the
nondefaulting party shall be entitled to select a new Closing Date up to one hundred
eighty (180) days after the original Closing Date.
(ii)
Seller's Failure to Perform. If the Seller fails to perform as
required under Paragraph 9.5 (c), then: (i) the Seller shall be liable to the Buyer, as
a recourse obligation, for all actual and consequential damages caused by the
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Seller as a result of its breach, together with all expenses of litigation and
attorneys' fees, court costs and expenses; and (ii) the Buyer shall have the option,
exercisable within sixty (60) days after the original Closing Date to either: (1)
pursue the Seller for specific performance of its obligations as Seller or (2)
continue the Company as if no put-call procedure had been implemented except
that the Seller shall be deemed to have consented to the unagreed action that
precipitated the Impasse; provided , however, that in no event shall the election of
either option (or failure to elect) preclude the Buyer from pursuing any other
remedy available to the Buyer as a matter of law or equity, including, but not
limited to, the damages described in clause (i) above.
(e)
No Withdrawal or Revocation. An Offer shall be irrevocable, and shall
not be subject to withdrawal or revocation by the Offeror, except by the written agreement
of all of the Members.
(f)
Decision-Making. Notwithstanding anything to the contrary in this
Operating Agreement, at any time during the period after the acceptance or rejection of an
Offer and the earlier of (i) the termination of the Offer pursuant to Paragraph
9.5(d)(1)(B) or Paragraph 9.5(d)(2)(B)(ii) above, as the case may be, or (ii) the Closing
Date, the Buyer shall have exclusive control of all decision making on behalf of the
Company (other than any decisions that may have a substantial adverse impact on the
financial obligations of the Seller in the event that the Buyer defaults in the purchase of
the Seller's Interest).
9.6
Operating Rules.
(a)
Multiple Purchasers. If more than one (1) Member exercises its right to
make a purchase of an interest under this Article IX with respect to any single Transfer
subject thereto, then each exercising Member shall participate in the purchase of a
proportionate part of such shares in the same proportion as the number of Interests then
owned by such exercising Member bears to the number of Interests then owned by all
such exercising Members.
(b)
Put-Call Parties. The Members recognize that an Impasse will be created
only if the Members are unable to agree on a decision requiring the unanimous consent
of the Members under Paragraph 8.2 above. In that case, all Members in favor of the
proposed decision shall be treated as a single Member for purposes of the operation of
Paragraph 9.5 above, and all Members opposing such decision shall be treated as a single
Member. In the event there is an Impasse and the commencement of a Put-Call offer and
Members who are treated as a single Member pursuant to the preceding sentence are
unable to agree on any specific action in the completion of the procedures set forth in
Paragraph 9.5 above (the "Non-Consenting Members"), the Company operations shall
continue as if no Put-Call offer had been implemented except that such Non-Consenting
Members shall have been deemed to changed their vote so that no Impasse is created with
any other Member under Paragraph 8.2 above.
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Alternative B
9.1
Basic Limitations. Except as otherwise provided in this Article IX, no Common
Member may sell, assign, give, hypothecate, pledge, transfer, or otherwise dispose of that
Member's Interest in the Company, in whole or in part, voluntarily, involuntarily, by operation of
law, or otherwise (a "Transfer"), to any Person other than the Company, without the consent of
the Managers, subject to their sole and absolute discretion. No Member shall dissociate from the
Company prior to its dissolution and winding up.
9.2 Investment Representations and Warranties. Each Member hereby represents and
warrants to the Company that its acquisition of its Interest is made as principal for its own account,
for investment purposes only, and not with a view to the resale or distribution of such Interest.
Each Member agrees that it will not sell, assign, give, hypothecate, pledge, transfer, or otherwise
dispose of any or all of its Interest to any Person who or which does not similarly represent and
warrant and agree as provided in this Paragraph 9.2.
9.3
Restrictions on Transfer of Interests.
(a)
Involuntary Transfers. In the event of the termination of full-time
employment with the Company of a Common Member for any reason whatsoever, or any
involuntary transfer or transfer by operation of law of any portion of a Common Member's
Interest, (a "Withdrawing Member" or a "Transferor"), the Company shall purchase all or
the transferred portion of the Withdrawing Member's Interest, for the price and upon the
terms set forth in Paragraph 9.3(d).
NOTE: If this were a member-managed company, counsel may want to insert some
variation of the following three sentences to limit the obligations of the Company in the
event of dissociation by a member. See 805 ILCS 180/35-50 and 180/35-60 of the Act.
Each Member agrees that, except in connection with a termination of employment, a
Member will not withdraw, as that term is used in the Act, from the Company. In the
event of a withdrawal in violation of this provision, the Company shall not be obligated
to purchase such Member's Interest, but such Member shall continue to receive
distributions from the Company as if such Member were a mere assignee of a Member,
until the time as such Member terminates fulltime employment with the Company. At the
termination of such Member's employment, the Company shall purchase all of the
withdrawing Member's Interest as otherwise provided herein.
(b)
Requirements for Admission. No permitted transferee of the whole or a
portion of a Member's Interest shall have the right to become a Member unless and until all
of the following conditions are satisfied:
(i)
A duly executed and acknowledge written instrument of transfer
approved by the Managers has been filed with the Company setting forth (A) the
intention of the transferee to be admitted as a Member; (B) the notice address of the
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2
transferee; and (C) the number of Interests transferred by the Transferor to the
transferee;
(ii)
An unqualified opinion of counsel in form and substance
satisfactory to counsel designated by the Managers that neither the Transfer nor any
offering in connection therewith violates any provision of any federal or state
securities law is delivered to the Company and the Remaining Members subject to
the Managers' right to waive the delivery of these opinions in their sole discretion;
(iii)
The Transferor and the transferee execute and acknowledge, and
cause any necessary other Persons to execute and acknowledge, such other
instruments and provide such other evidence as the Managers may reasonably
deem necessary or desirable to effect such admission, including without
limitation: (A) the written acceptance and adoption by the transferee of the
provisions of this Operating Agreement including a representation and warranty
that the representations and warranties in Paragraph 9.2 are true and correct with
respect to the transferee; (B) the transferee's completion of a purchaser
qualification questionnaire that will enable counsel for the Company to determine
whether such proposed substitution is consistent with the requirements of a private
placement exemption from registration under the Securities Act of 1933 and
relevant state law; and (C) the transferee's completion, if applicable, of an
acknowledgment of the use of a purchaser representative, and such
representative's completion of a purchaser representative questionnaire that will
enable counsel for the Company to determine whether such proposed substitution
is consistent with the requirements of a private placement exemption from
registration under the Securities Act of 1933 and relevant state law;
(iv)
The admission is approved by the Managers, with the granting or
denial of the admission to be within the sole and absolute discretion of the
Managers; and
(v)
A transfer fee has been paid to the Company by the Transferor
sufficient to cover all expenses in connection with the transfer and admission,
including but not limited to attorneys’ fees for the legal opinions referred to above,
subject to the Managers' right to waive the payment of these fees in their sole
discretion.
(c)
Rights of Mere Assignee. If a transferee of an Interest is not admitted as a
Member, such transferee, also known as an Economic Interest Owner, such transferee
shall be entitled to receive the allocations and distributions attributable to the transferred
Interest, but shall not be entitled to inspect the Company's books and records, receive an
accounting of Company financial affairs, exercise the voting rights of a Member, or
otherwise take part in the Company's business or exercise the rights of a Member under
this Operating Agreement, but such transferee shall be subject to all of the restrictions,
provisions, and limitations otherwise applicable to Members, including the restrictions on
transfers and requirement to sell such assignee Interest as provided herein. If such
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transferee is employed by the Company, he or she shall be obligated to sell such Interest
upon the termination of employment or otherwise as provided in this Paragraph 9.3. If
such transferee is not employed by the Company, he or she shall be obligated to sell such
Interest upon any involuntary transfer as provided in this Paragraph 9.3, or upon the
termination of employment of the transferor who made such permitted transfer to the
transferee.
(d)
Purchase Price and Terms.
(i)
Purchase Price for Interests of Common Members. If the
Company is required to purchase the Interest of any Common Member (or a mere
assignee or transferee of a Common Member), pursuant to the provisions of
Paragraph 9.3(a), the purchase price for any Common Interest shall be equal to the
increase in the Book Value of such Interest during the time the selling Member
held such Interest. The Book Value of an Interest shall be determined by the
accountants regularly employed by the Company and shall be equal to a pro rata
portion of the Book Value of the entire Company, after making adjustments for
the Book Value of the Preferred Interest. Any Member to be redeemed, or such
Member's successor in interest, shall have the right to reasonable access to the
books and records of the Company for the sole purpose of reviewing the
calculations of the Book Value of the Company made by such accountants as part
of determining the purchase price of such Common Interest. The Book Value of
the Company is that number currently described as___________________on the
financial statements of the Company.
(ii)
Payment of Purchase Price and Closing. The closing of any sale
and purchase of the Transferor's Interest in the Company shall be within ninety
(90) days of the event causing the purchase obligation under Paragraph 9.3(a).
The Company shall pay the purchase price at the closing, unless the parties agree
upon different terms. The Transferor shall deliver documents satisfactory to the
Company conveying its Interest free and clear of all liens, claims and
encumbrances, any of which may be paid out of the purchase price, with the
remainder, if any, paid to the Transferor. If the purchase price is insufficient to
satisfy any such liens, the Transferor shall discharge the balance.
(e)
Certain Permitted Family Transfers. Notwithstanding the preceding
provisions of this Paragraph 9.3, any Member shall be permitted to transfer, by gift or sale,
any or all of such Member's Interest in the entity to any Family Member without first
offering such Interest for sale to the Company or any other Member. For purposes of this
Paragraph 9.3(e), a Family Member is any individual who is a descendant of such
Member, or any person married to such descendant, and also includes any corporation,
partnership, limited liability company, or any other business entity a ninety percent
(90%) interest in which is owned by one or more descendants of such Member, or any
person married to such descendant, and any trust, ninety percent (90%) of which is held
for beneficiaries who are descendants of such Member, or any person married to such
descendant or such Member. Such permitted transferee Family Member shall be deemed
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admitted as a Member of the Company upon the satisfactory completion of the following:
(i)
the transferee shall have accepted and agreed to be bound by the
terms and provisions of this Agreement and such other documents or instruments
as the Managers may require;
(ii)
a counterpart of this Agreement shall have been executed to
evidence the consents and agreements above;
(iii) if the transferee is an entity other than a natural person, the
transferee shall have provided the Managers with evidence satisfactory to
counsel for the Company of authority to become a Member under the terms and
provisions of this Agreement including providing the Managers with a copy of
any organizing or governing documentation for such entity (partnership
agreement, trust agreement, corporate by-laws, etc.);
(iv)
if deemed necessary or desirable by the Managers in their sole
and absolute discretion, counsel for the Company, or a counsel for the transferee,
which counsel shall not have been disapproved of by the Managers, shall have
rendered an opinion to the Managers that the admission of the transferee as a
Member is in conformity with the Act and that none of the actions taken in
connection with the admission will cause the termination (whether under state
law or for federal tax purposes) or dissolution of the Company, or will adversely
affect its classification as a partnership for federal income tax purposes;
(v)
the transferee shall have paid all reasonable legal fees of the
Company and the Managers and filing and publication costs, if any, in
connection with its admission as a Member.
Upon the liquidation of, or distribution from, any business entity, or upon the distribution
from any trust, such transferee shall be admitted as a Member of the Company only upon
compliance with the provisions set forth in Paragraphs (i) through (v) above. Such permitted
transferee Family Member shall be required to sell its Interest to the Company at the times set
forth for a permitted assignee as described in Paragraph 9.3(c) above, for the price and on the
terms as provided in Paragraph 9.3(d) above.
9.4
Interests in Member. A Member that is not a natural person may not cause or
permit an ownership interest, direct or indirect, in itself to be disposed of such that, after the
disposition: (a) the Company would be considered to have terminated within the meaning of
Code § 708; or (b) without the written consent of the Managers that Member would cease to be
controlled by substantially the same Persons who control it as of the date of the Member's
admission to the Company. For a period of one hundred twenty (120) days after notice to the
Company of any Member's breach of the provisions of clause (b) of the immediately preceding
sentence, the Company shall have the option to buy, and upon exercise of that option the
breaching Member shall sell, the breaching Member's Membership Interest, at the price
determined in accordance with Paragraph 9.3(d) above. The breaching Member shall deliver
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documents satisfactory to the Company conveying its Interest free and clear of all liens, claims
and encumbrances, any of which maybe paid out of the purchase price, with the remainder, if any,
paid to the selling Member. If the purchase price is insufficient to satisfy any such liens, the
selling Member shall discharge the balance.
9.5
Restrictions on Preferred Interests. Except as otherwise provided or permitted in
this Agreement, a Preferred Member shall not sell, assign, give, hypothecate, pledge, transfer, or
otherwise dispose of that Member's Preferred Interests in the Company, in whole or in part,
voluntarily, involuntarily, by operation of law, or otherwise, to any Person other than the
Company, without the consent of the Managers, subject to their sole and absolute discretion.
ARTICLE X
DISSOLUTION AND TERMINATION
10.1 Events of Dissolution. The Company shall be dissolved, and shall terminate and
wind up its affairs, upon the first to occur of the following:
(a)
the sale or other disposition of substantially all of the assets of the
Company; or
(b)
the consent of Members holding at least two thirds (2/3) of the Interests to
dissolve the Company.
10.2 Liquidation. If the Company shall be dissolved by reason of the occurrence of any
of the circumstances described in Paragraph 10.1, no further business shall be conducted by the
Company except for taking such action as shall be necessary for the winding up of its affairs and
the distribution of its assets to the Members. Upon such dissolution, the Managers shall select a
liquidator or, if the Managers fail to select a liquidator, or if the liquidator selected is unable or
unwilling to so act, the Common Members shall select a liquidator by a Majority Vote of all
Common Members. Such liquidator shall have full authority to wind up the affairs of the
Company and to make final distribution as provided herein. Upon such dissolution of the
Company, the liquidator shall take the following steps:
(a)
Determine which Company properties and assets should be distributed in
kind, and dispose of all other Company properties and assets at the best cash price
obtainable therefor under the circumstances.
(b)
Pay all Company debts and liabilities, in the order of priority as provided
under applicable law, or otherwise make adequate provision therefor.
(c)
Determine by independent appraisal the fair market value of the
Company properties and assets to be distributed in kind, and credit or charge (as the case
may be) the Capital Account of each Member with the amount that would have been
credited or charged to such Member in accordance with Article IV if such properties and
assets had been sold at fair market value.
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(d)
Credit or charge (as the case may be) each Member's Capital Account
with such Member's share of all Company Profits and Company Losses that were not
previously reflected in any Capital Accounts and that were realized or incurred during the
Fiscal Year or Fiscal Years that include the dissolution and termination, up to and
including the date of distribution, net of all distributions that were not previously
reflected in any Capital Accounts and that were made to such Member during such
Fiscal Years up to but not including such date.
(e)
Distribute to each of the Members the balance, if any, of the properties
and assets of the Company as provided in Article VI, as if there were an actual sale of all
of the Company's properties and assets. Such distribution may be made in cash or in kind,
and the proportion of such distribution that is received in cash may vary from Member to
Member as the liquidator may decide.
(f)
Notwithstanding Paragraphs 10.2(a) through (e), if any Member shall be
indebted to the Company for any reason whatsoever, the liquidator may apply any cash
allocated to such Member in accordance with this Paragraph 10.2 to the payment of such
indebtedness. If such cash is not sufficient to liquidate such indebtedness in its entirety
then, until payment in full of such indebtedness by such Member, the liquidator shall
retain such Member's distributive share of the Company properties and assets and, after
applying the cost of operation of such properties and assets during the period of such
liquidation against the income therefrom, shall apply the balance of such income toward
the liquidation of such indebtedness; provided, however, that if upon the expiration of six
months after notice of such outstanding indebtedness has been given to such Member,
such amount has not been paid or otherwise liquidated in full, the liquidator may sell the
assets allocable to such Member at private or public sale at the best cash price
immediately obtainable under the circumstances, and so much of the proceeds of such
sale as shall be necessary to liquidate such indebtedness shall then be so applied, and the
balance (if any) of such proceeds shall be distributed to such Member.
(g)
The liquidator shall comply with all requirements of the Act, or other
applicable law, pertaining to the winding up of a limited liability company.
10.3 Filings. Upon dissolution and complete winding up of the Company, the
liquidator shall file any and all certificates and other documents required under the Act
including, but not limited to, a Certificate of Cancellation as required by the Act.
10.4 Termination. The Company shall terminate when all of the assets of the
Company have been distributed in the manner provided for in Paragraph 10.2 of this Agreement
and the Certificate shall have been canceled in the manner required by the Act.
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ARTICLE XI
BOOKS AND RECORDS
11.1 Books and Records; Banking; Accounting. The Managers shall (a) keep or cause
to be kept at the address of the Company (or at such other place the Managers shall determine)
accurate and proper books and records regarding the status of the business and financial
conditions of the Company (b) be responsible for and handle all banking functions and
relationships, and (c) determine the Fiscal Year of the Company for financial and for income tax
purposes.
ARTICLE XII
TAX MATTERS
12.1
Company Tax Returns.
(a)
The Managers shall cause to be prepared and timely filed all tax returns
required to be filed for the Company, and shall cause to be timely paid all taxes owed by
the Company. The Managers may, in their discretion, make or refrain from making any
foreign, federal, state or local income or other tax elections for the Company that they
deem necessary or advisable, including, without limitation, any election under Code
§754.
(b)
Bob is hereby designated as the Company's "Tax Matters Partner" under
Code § 6231(a)(7) and shall have all the powers and responsibilities of such position as
provided in the Code. The Managers are specifically directed and authorized to take
whatever steps the Managers, in their discretion, deem necessary or desirable to perfect such
designation, including filing any forms or documents with the Internal Revenue Service and
taking such other action as may from time to time be required under the Treasury
Regulations issued under the Code. Each Member hereby agrees to cooperate with the Tax
Matters Partner with respect to all matters within its authority as Tax Matters Partner.
Expenses incurred by the Tax Matters Partner, in its capacity as such, will be borne by the
Company.
12.2 Forms K-1 and 1065. The Managers shall, as promptly as practicable, cause to be
prepared and mailed to each Member of record an Internal Revenue Service Schedule K-1, Internal
Revenue Service Form 1065, and any other forms that are necessary or advisable for the Members to
satisfy their federal tax reporting obligations.
12.3 Taxation as Partnership. The Members agree that the Company will seek to be
treated as a partnership for United States federal income tax purposes.
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ARTICLE XIII
MISCELLANEOUS
13.1 Amendments. In addition to amendments to this Agreement otherwise authorized
under this Agreement, the Managers may, at any time and without consent of any Member, make any
amendment to this Agreement provided that such amendment:
(a)
does not adversely affect the rights of the Members or their assignees in any
material respect;
(b)
merely corrects an error or resolves an ambiguity in, or inconsistency
among, the provisions of this Agreement;
(c)
deletes or adds any provision of this Agreement that is required to be so
deleted or added by any federal or state governmental authority;
(d)
merely amends this Agreement or the Company's Certificate to admit new
Members in accordance with this Agreement;
(e)
amends Article IV in accordance with Paragraph 4.2(c);
(f)
amends Article V in accordance with Paragraph 5.2(k)(ii); or
(g)
reflects a change in the Act that permits or requires an amendment
(without adversely affecting the rights of any Member in any material respect).
Except as otherwise provided in this Agreement, this Agreement may also be amended by
a written instrument executed by all of the Preferred Members and the Common Members
holding more than fifty percent (50%) of all Common Interests.
13.2 Successors. This Agreement shall be binding as to the executors, administrators,
estates, heirs and legal successors, assigns, or nominees or representatives, of the Members.
Except as otherwise provided in this Agreement, no persons other than the Members and their
respective executors, administrators, estates, heirs and legal successors, assigns, or their
nominees or representatives, shall obtain any rights by virtue of this Agreement.
13.3 Counterparts. This Agreement may be executed in several counterparts with the
same effect as if the parties executing the several counterparts had all executed one counterpart.
13.4 Integration. This Agreement constitutes the entire agreement among the
Members pertaining to the subject matter hereof and supersedes all prior and contemporaneous
agreements and undertakings of the Members in connection therewith.
13.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois without giving effect to the principles of conflict of
laws thereof.
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13.6 Severability. This Agreement shall be construed to the maximum extent possible
to comply with all of the terms and conditions of the Act. If, notwithstanding the previous
sentence, a court of competent jurisdiction concludes that any provision or wording of this
Agreement is invalid or unenforceable under the Act or other applicable law, the invalidity or
unenforceability or such provision or wording will not invalidate the entire Agreement. In such a
case, this Agreement will be construed so as to limit any term or provision so as to make it valid
or enforceable within the requirements of applicable law and, in the event such term or provision
cannot be so limited, this Agreement will be construed to omit such invalid or unenforceable
provision or term. If it is determined that any provision relating to the distributions and
allocations of the Company or to any fee payable by the Company is invalid or unenforceable,
this Agreement shall be construed or interpreted so as (a) to make it enforceable or valid and (b)
to make the distributions and allocations as closely equivalent to those set forth in this
Agreement as permissible under applicable law.
13.7 Headings. The headings in this Agreement are included for convenience and
identification only and are in no way intended to describe, interpret, define or limit the scope,
extent or intent of this Agreement or any provision hereof
13.8 Filings. Following the execution and delivery of this Agreement, the Managers
shall promptly prepare any documents required to be filed and recorded under the Act, and the
Managers shall promptly cause each such document to be filed and recorded in accordance with
the Act and, to the extent required by local law, to be filed and recorded or notice thereof to be
published in the appropriate place in each jurisdiction in which the Company may hereafter
establish a place of business. The Managers shall also promptly cause to be filed, recorded and
published such statements or other instruments required by any provision of any applicable law
of the United States or any state or other jurisdiction that governs the conduct of its business
from time to time.
13.9 Power of Attorney. Each Member does hereby constitute and appoint each and all
of the Managers as its true and lawful representative and attorney in fact, in its name, place and
stead to make, execute, sign, deliver and file (a) any amendment of the Certificate required
because of an amendment to this Agreement; (b) any amendment to this Agreement made in
accordance with the terms hereof; and (c) all such other instruments, documents and certificates
that may from time to time be required by the laws of the United States of America, the State of
Illinois or any other jurisdiction, or any political subdivision or agency thereof, to effectuate,
implement and continue the valid and subsisting existence of the Company or to dissolve the
Company, and (d) to execute any instruments, documents or certificates that have previously
been approved by or on behalf of the Company pursuant to the provisions of the Agreement.
The power of attorney granted hereby is coupled with an interest and shall (a) survive and
not be affected by the subsequent death (or cessation of existence), incapacity, disability,
dissolution, termination or bankruptcy of the Member granting the power of attorney or the
transfer of all or any portion of such Member's Interest and (b) extend to such Member's
successors, assigns and legal representatives.
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13.10 Notices. Notices, requests, reports, payments, calls or other communications
required to be given or made to any Member hereunder shall be in writing and shall be deemed to
be given or made when properly addressed and posted by registered or certified mail, postage
prepaid, to such Member at such Member's address last shown on the Company's books and
records. Addresses shown under the signatures of each Member shall be considered the last
known address of such Member unless and until the Company is otherwise notified by such
Member.
13.11 Arbitration. With respect to any controversy or claim that arises under the terms of
this Agreement and that is not resolved through negotiation, the Company and each Member
agrees to seek resolution of such controversy or claim through arbitration in __________,
Illinois in accordance with the current Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award entered by the arbitrator(s) may be entered in any
court having jurisdiction thereof The costs of arbitration shall be allocated among the parties as
directed by the arbitrator(s).
13.12 Title to Company Assets. The assets of the Company shall be owned by the
Company as an entity, and no Member shall have any direct ownership interest in such assets or
any portion thereof.
13.13 Creditors. Except as provided in Paragraph 8.3 of this Agreement, no provision of
this Agreement shall be for the benefit of, or enforceable by, any creditor of the Company.
13.14 Execution of Additional Documents. Each Member hereby agrees to execute such
other and further statements of interest and holdings, designations, powers of attorney and other
instruments reasonably necessary for the Company to comply with any applicable laws, rules or
regulations.
13.15 Confidentiality. Any mediators appointed pursuant to this Agreement shall be
under a duty to maintain in confidence, to the greatest extent reasonably possible, any and all
information relating to the Company and its Members or creditors.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Operating
Agreement of Limited Liability Company as of the date first above written.
Preferred Members:
Common Members:
Bob, L.L.C.,
an Illinois limited liability company
By:_____________________________
__________________________________
John Doe
Larry, L.L.C.,
an Illinois liability company
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By: _____________________________
Fred Corporation,
an Illinois corporation
By: _____________________________
[Counterpart Signature Page to 123 Main Street, L.L. C.]
Operating Agreement of Limited Liability Company]
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SCHEDULE 1
TO THE 123 MAIN STREET, L.L.C. OPERATING AGREEMENT
OF LIMITED LIABILITY COMPANY
Initial Capital Contributions and Subscription of Preferred Member
Member
Contribution
Value
John Doe
$ _________ plus all of its
right, title and interest in the
real property legally described
on Schedule 2 attached hereto
$_______________
Initial Capital Contributions and Subscriptions of Common Members
Member
Members:
Bob
Larry
Fred
Cash Contribution
($1.00 per
Common Interest)
$
Percentage
Interests
$500.00
$350.00
$150.00
50%
35%
15%
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Schedule 2
The 123 Main Street, L.L.C. Operating Agreement of Limited Liability Company
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