Hey there, my names Oney Snyder, and I’m an associate attorney here at Carlile Patchen & Murphy. I practice within the firm’s real estate department, handling a variety of transactional matters. I am also a licensed Title Insurance agent here in the state of Ohio and do work for our title company, Cornerstone Title Agency.
This is part of a series of videos that we are releasing regarding various legal issues that you should consider when you plan to invest in real estate. If there are any specific questions you have about this video, or other topics you would like to see us cover, feel free to reach out to me via email at firstname.lastname@example.org.
On this video I am going to discuss certain aspects of a document called an operating agreement. This video presupposes that you own your real property in an LLC. If you do not own your rental property in an LLC and are unsure why you should, please see our other videos discussing this topic.
Now, here is a quick disclaimer before we begin.
This video is for informational purposes only and should not be considered legal advice. Before making decisions for your business it is always best to have candid conversation with your attorney about your specific circumstances.
What is an operating agreement?
Now, the operating agreement is the primary governing document for your LLC. Among other things, it sets forth how the LLC is managed, how income will be allocated and distributed, and contains provisions governing transfers of LLC interests.
Sole ownership vs Co-ownership
If you are the sole owner of you LLC, the operating agreement is likely going to be short and simple because you own all of the interests in the LLC and thus make all of the decisions for the company.
However, the more owners or “members” of the LLC, the more complicated this document can quickly become.
Now, it’s easy to Google “operating agreement” and find a document out there that seems ready to use, but keep in mind that there are many provisions in an operating agreement that vary based on your individual situation and the structure which you and your co-owners have decided upon, so it is best to seek the assistance of your attorney when putting together this document. Talking through all of these considerations with the other members and your attorney up front can save a lot of time money, and headaches later on.
How should I structure my LLC?
One thing you need to consider is whether your LLC will be “Member Managed” or “Manager Managed.” A lot of this depends on how the day to day operations are handled and what specific acts or decisions certain members are authorized to take or make.
If you plan to simply own the LLC 50/50 with another person, the most common set up is Member Managed. This means that both members will have the ability to carry out certain actions unilaterally. However, it is common and prudent for the operating agreement to require unanimous consent for certain “bigger” decisions.
The more common scenarios for using a Manager Managed LLC are when there are three or more members but less than all will have management authority or when the majority of the interests are vested in one or some, but not all, of the members. Let’s say there are two 45% members and one 10% member. In this scenario it might make sense for both of the 45% members to be considered “Managers” with specific powers that they don’t want the other 10% member to have.
Keep in mind, if you’re 50/50 at the start, there might come a time when you have another minority member. If that happens, you can amend the operating agreement to better reflect the new ownership structure. You don’t have to be stuck with what made sense at an earlier point in time, but is no longer the best option for your company.
Transferring and Managing Your Interests
Deciding on whether your situation is better suited for a member managed LLC or a manager managed LLC is only the tip of the iceberg when it comes to crafting an operating agreement that makes sense for you and your company. Another important aspect is limiting the ability of members to transfer their interests to third-parties and governing what happens to a member’s interests upon his or her death, disability, divorce, or any other occurrence that may give rise to a transfer of the LLC interests. These topics will be discussed in separate videos.
Please contact me or your Carlile Patchen and Murphy attorney with any questions you might have. We’d be happy to discuss them with you. Thank you!