Showing What You Own: How Your Operating Agreement Reflects Your Ownership
This is the second in a series of blog posts geared towards small business owners outlining the importance of Operating Agreements and explaining the components. Read the first in the series here.
Owners of multi-member limited liability companies (“LLC”) need to understand how their business’s Operating Agreement reflects who owns what portion of the business and what they contributed to gain that ownership.
An Operating Agreement should outline the capital contributions made by each member (or reflect such contributions in an exhibit or other attachment). A capital contribution is the value each owner invests in the business to get it started (or at times after the business is already in operation). Capital contributions aren’t just cash. Examples of potential capital contributions are:
- Cash
- Real estate
- Vehicles
- Equipment
- Office furniture
- Computers
- “Sweat equity”
- Professional services such as legal, architectural, marking, etc.
- Patents, copyrights, trademarks
- Client lists
- Software
All members of an LLC do not have to contribute in the same form of contribution. Some may contribute cash while others contribute services or property. It is important that the members agree upon the value of non-cash contributions at the time of the contribution, and that value is documented. This ensures that there are no disagreements about the value at a later time.
The business should have a ledger or schedule of each member’s contribution, when it was contributed, the type of contribution, and the value of that contribution. This is important because it ensures that each member’s investment is accurately documented and acknowledged. It also evidences the agreed-upon value for non-cash contributions. It provides a clear record for tax filings and can be used to calculate a member’s basis in the LLC. Finally, it may also come into play when determining how profits are distributed- which will be discussed in a future blog.
If need legal assistance regarding your LLC’s Operating Agreement, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.
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