An LLC shareholder agreement encompasses the specific expectations between the different shareholders of the business. A limited liability company (LLC) is in some ways similar to a corporation but with less formal of requirements.
Many business owners choose to form an LLC because of the following advantages:
Although LLCs are common due to their tax and limited liability advantages, it can be difficult to find clarity when an issue arises that is not mentioned in the governing documents. Different LLC members often have different interests. If a disagreement occurs, it can be difficult to determine the best solution.
Generally speaking, an LLC does not have shareholders. Instead, partners or contributors are referred to as members. An operating agreement sets the specific terms of the LLC membership.
One of the first and most important steps in creating an LLC is to create a membership agreement. An LLC membership agreement should include the following points:
It is important to keep in mind that the LLC membership agreement is a legal document. This means that it is legally enforceable and all members should carefully review it before signing. Although some states do not require that an LLC membership agreement is created before starting a business, it is always a good idea to create one regardless.
An LLC membership agreement protects personal liabilities while also clearly listing the expected operating terms of the business. A membership agreement can prevent misunderstandings from occurring between business partners. Shareholder agreements are especially useful for small businesses in which the members are active in the day to day operations of the business.
Shareholder agreements are often used in a corporation setting rather than in LLCs. However, LLC companies can also benefit from shareholder agreements. If you are going to use a shareholder agreement in an LLC setting, it is important to understand the process and to ensure that it makes sense for your business.
There are a few specific provisions that are often found in shareholder agreements that could benefit an LLC membership:
It is best to evaluate each provision in the shareholder agreement before applying it to an LLC business setting. Some provisions will be useful to a company whereas others will not make sense.
An LLC operating agreement is a mix between a shareholder agreement and an LLC membership. It often includes the specific bylaws and agreements of the business. One of the biggest advantages of an LLC operating agreement is that it fills in the often unambiguous parts of an LLC membership agreement. There are default provisions which take place when questions arise and a solution is not available. For this reason, many states require that all LLCs have an operating agreement in place. A few examples of fill-in provisions include:
Keep in mind that all provisions will not work for every business. It is necessary to determine what type of agreement works best for yours.
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