| The most obvious purpose of an LLC Operating | | | | company issues membership units to the members of |
| Agreement is to put in place a set of operational and | | | | the LLC. |
| governance rules for a limited liability company. | | | | Then ownership is determined by dividing the # of |
| However, a second purpose is to properly evidence | | | | membership units held by a member by the total |
| the ownership of the company and what rights and | | | | number of units issued to all Members. For example, |
| responsibilities the members have. Member disputes | | | | the LLC Operating Agreement may issue 1,000 units |
| are one of the biggest risks of a multi-member LLC. | | | | total with 750 going to Bob Smith and 250 going to |
| Use the LLC Operating Agreement to reduce potential | | | | Mary Jones. Bob owns 75% of the LLC (750/1000) |
| problems. | | | | and Mary owns 25% (250/1000). |
| An LLC Operating Agreement should have a major | | | | Later when the limited liability company wants to |
| section that sets forth how ownership in a limited | | | | increase Mary's ownership or admit a new member |
| liability company is determined. There are generally two | | | | who is going to contribute money to the LLC, the |
| structures: (i) a percentage ownership structure and (ii) | | | | limited liability company simply authorizes and issues |
| a membership units structure. | | | | more units. The percentages automatically adjust. This |
| With percentage ownership, each member is given a | | | | provides for much more flexibility and an easier |
| percentage ownership in the limited liability company. | | | | structure to accommodate the limited liability company |
| For example, the LLC Operating Agreement will state | | | | as it evolves. |
| that Bob Smith owns 75% and Mary Jones owns | | | | Another advantage of the Membership Unit Structure |
| 25%. | | | | over the Percentage Ownership structure is that it is a |
| Percentage ownership was a common way to | | | | lot easier in the LLC Operating Agreement to define |
| structure ownership when the limited liability company | | | | Member rights attributable to a Membership Unit. The |
| was first introduced but it does not provide for much | | | | Membership Unit structure is based on the corporate |
| flexibility as it causes complexity whenever the | | | | stock ownership structure and so there is a wealth |
| ownership needs to be changed. LLC businesses | | | | and magnitude of precedence to use to come up with |
| were finding issues with this structure when the LLC | | | | a structure that is very clear and gives rise to less risk |
| needed to admit a new member or increase | | | | of misunderstandings. |
| ownership to an existing member. | | | | Another benefit is that Membership Units can also be |
| The better method is the membership units structure. | | | | evidenced by LLC Membership Certificates that can |
| This structure is similar to a corporation that issues | | | | be issued to Members. This is similar to corporations |
| shares of stock. With this structure, the limited liability | | | | where stock certificates are issued. |