A very common question we get asked at our law firm of McGrath and Spielberger is “What do I need to do to add an owner to my company?” The answer to that exact question is similar to the related question of “How do we transfer the ownership interests of a Member who is leaving the LLC?” Of course, you can also have a situation in which a current Member is only transferring or selling some of that Member’s interests in the company.
This Part 4 of our ongoing series focuses on Operating Agreement amendments and/or similar changes as a result of a change in ownership / membership. See Part 1 of this series for a general overview of sale / purchase / transfer of company membership interests and the legal process, Part 2 for more information on the Purchase and Sale Agreement / Membership Interest Transfer Agreement, and Part 3 regarding “Resolution” which should be a part of the membership interest (ownership) transfer process.
A transfer of membership / ownership interests in an LLC should result in amending the Operating Agreement (shorthand = “OR”) or the creation and execution of a new Operating Agreement. We’ll now address 3 different common scenarios, and keep in mind these are brief summaries, they are not intended to be a detailed or comprehensive listing of all relevant or necessary items / issues.
- AMENDING THE WRITTEN OPERATING AGREEMENT. If there is a written, executed OA in place of reasonable quality, then an amendment document can be utilized. The Amendment to OA would at least summarize the situation and the changes, reference other key documents, be dated, and be executed by the LLC itself and each individual Member (including any new Members and any outgoing Members).
- REPLACING AN EXISTING OPERATING AGREEMENT. There are times when replacing a past-written OA with a new one makes the most sense, including when there is a change in ownership. We’ll address this in more detail in a separate article.
- CREATING THE COMPANY’S FIRST WRITTEN OPERATING AGREEMENT. Many LLCs do not have a written OA. In nearly every instance, the creation and execution of a written OA should take place in light of the change in ownership structure. Interestingly, depending on the circumstances and applicable strategical goals, sometimes it makes sense for that OA to come into existence: before the change in membership (which may then also require an Amendment to OA as discussed above); or concurrent with the change in membership; or after the change in membership. We may address those timing options, and why each could make sense, in a different article.
An Amendment to Operating Agreement is often 1 or 2 pages long. An entire Operating Agreement is typically between 10 and 50 pages long. Yes, you correctly infer that there is a wide variety as to how complex and detailed Operating Agreements can be.
An LLC Operating Agreement is typically a private document vs. something which gets “filed” with anyone. This doesn’t mean it is forever confidential, it’s just internal. The contents of an LLC OA could be agreed to be confidential by the parties, although that also does not guarantee it will never be seen by outside persons or entities.
The law does not require an LLC OA to be notarized or witnessed by any third parties. In concept, there could be a requirement within a certain limited liability company which does require it – but that would be uncommon.
The LLC OA – including any properly agreed upon amendments – are typically part of the formal proof of the issues covered in the OA. This means that membership / ownership listings (including changes) in such documents are excellent proof of who owns how much. Anyone who is a signor to an OA or related Amendment should have a tough time later claiming to be unaware of the content of such documents or to deny that they agreed to the content.
LLC Operating Agreements and their Amendments are commonly worked on by business law attorneys. However, attorneys need to pay attention and have their brains and skill sets engaged even when performing straightforward work. Paying attention gets the best results for clients, which is what we do here at McGrath & Spielberger.