The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
An LLC Operating Agreement expresses the fundamental understanding among its members of the how the company will operate as well as the members’ respective rights and obligations, including such issues as voting, ownership and management rights.
The Operating Agreement is to an LLC what the bylaws (and shareholders agreement) is to a corporation. The most important question that should be addressed in an Operating Agreement is: What is the relationship involved?
An Operating Agreement between two equal partners, both of whom will be involved in the day-to-day operations of the LLC, will look very different from that of a company with one founder providing sweat equity or an LLC with multiple financial backers.
Classes of Interests
For various business, legal or tax reasons, LLCs may issue classes of LLC interests. Different classes may have differing rights with regard to any aspect of an LLC’s business or operations, including economic rights, voting rights and rights to distributions from the company.
Economic Rights & Distributions
The Operating Agreement may set forth how economic profits and losses are allocated among the members and how and when distributions will be made. The amount and timing of distributions can be set at management's discretion, required at established times or triggered by certain events. LLC Operating Agreements sometimes include both required and discretionary distributions.
The Operating Agreement may set forth how the LLC is managed. An LLC can be managed by one or more members; by a board of persons (composed of members and/or non-members); or by one or more appointed managers. Generally, management is responsible for strategic decisions and the day-to-day running of the business, subject to any predefined limitations.
Management-related provisions commonly found in an LLC Operating Agreement include:
Parties in an LLC Operating Agreement can waive or otherwise modify the traditional fiduciary duties of care and loyalty that may otherwise be imposed by default, as opposed to in a corporation. The practical effect of fiduciary duties is the subject of a significant body of case law, and language in an LLC Operating Agreement can be a primary determinant of the outcome of litigation among members of the LLC.
Raising Additional Capital & Admitting Additional Members
An LLC may require additional working capital in the future. The procedures for raising supplemental funds (either from existing members or by accepting new investors) are generally spelled out in the Operating Agreement.
Transfer of Interest or Withdrawal from LLC
An LLC Operating Agreement often describes when, and under what conditions, a member may transfer his/her interest in the LLC, including for estate planning purposes. Similarly, the Operating Agreement may set forth the process and permitted circumstances under which a member may withdraw from the LLC prior to its dissolution; however, such a withdrawal, if permitted, is frequently subject to significant conditions and limitations.
Often, a permitted transfer or withdrawal will trigger a right of first refusal, permitting the other members to acquire the interest at issue on such terms as are set forth in the Operating Agreement.
An LLC Operating Agreement often states the events or votes which will trigger the winding up and dissolution of the company, and typically details how any LLC assets will be distributed after the discharge of all its liabilities
Since the LLC Operating Agreement is the governing document in regard to how the LLC is owned, operated and maintained, it is a good idea to make sure it covers all matters that could come up throughout the life of the company.
As the LLC grows and adapts, so, too, can the LLC Operating Agreement. It can be changed or modified to suit the LLC’s growing or changing needs. Since the LLC Operating Agreement is not on file with the state of Delaware and therefore not part of the public record, it can be internally changed or altered at any time during the life of the LLC.
THE ABOVE ARTICLE IS NOT LEGAL ADVICE AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. IT IS A GENERAL DESCRIPTION OF SEVERAL, BUT NOT ALL, ITEMS TO CONSIDER WHEN ASSESSING YOUR COMPANY’S OPERATING AGREEMENT. IT IS NOT AN ATTEMPT TO LIST ALL CONSIDERATIONS THAT MIGHT BE ADVISABLE BY AN ATTORNEY FAMILIAR WITH DELAWARE LLC LAW. IF YOU REQUIRE LEGAL ADVICE WE RECOMMEND THAT YOU ENGAGE THE SERVICES OF A LICENSED ATTORNEY.
Although a Delaware company can operate all over the world, there is an additional step any Delaware corporation or LLC must take in order to be in compliance with its home state—or any other state in which you’d like to operate your company.
This extra step is called Foreign Qualification. It is called Foreign Qualification because your Delaware company is considered domestic to Delaware and foreign to every other state.
Foreign Qualification is the process in which your home state gives you permission to operate your Delaware company in that state. This step is both necessary and normal, regardless of whether you are operating a Delaware LLC or a Delaware Corporation.
Every state in the country mandates different requirements when it comes to registering foreign entities to do business. Vermont, like many other states, stipulates a state fee, an application process and a Certificate of Good Standing from Delaware.
Vermont also dictates that a Registered Agent be documented on the Application for Authority (the name of the Foreign Qualification application). It will be the Registered Agent’s job to receive any notices from the Secretary of State of Vermont and forward them to your company’s contact person.
Vermont will need a responsible party to sign the application. For an LLC, this is often the Managing Member. For a corporation, this is typically the president.
The Registered Agent does not need to sign the application. Vermont does not have a publication requirement, unless there is a specific requirement in the county in which the business is operating.
Once your company is properly registered as a foreign entity in Vermont, you will be responsible for submitting a Vermont annual report, which must be filed by March 15.
The cost of the Vermont annual report is $140 per year for a foreign LLC and $200 per year for a foreign corporation. The annual report notices are mailed to the address of your Registered Agent. The annual report can be filed by anyone with the authority to do so by your company.
We can take care of your company’s Foreign Qualification process and act as your Vermont Registered Agent.
For more information on foreign qualifying your company in Vermont or to start the process, please call 1-800-345-2677, Extension 6130 or email me.
In our ongoing quest for online tools that can help us prosper in our industry, we have found another tech product that we’d like to share with you.
With RightSignature, we at Harvard Business Services, Inc. can now offer our clients the option of signing documents without having to print them out—they can use their mouse or finger, directly from their computer, smartphone or tablet.
When clients are on the go, they may not have time to print a document, sign it and fax it back. They could be driving, sitting in an airport or may just not have access to a printer, fax machine or scanner.
However, thanks to RightSignature, this will no longer be a problem. When clients receive a document from us that needs information and/or a signature, they are prompted to fill out the necessary information and only that information.
They cannot send the document back if they have not filled in all the information we have requested—this cuts down on human error and saves both us and our clients a considerable amount of time.
The document is clearly marked and the Submit button is easy to find. There is also a Help link if a client should need assistance, though RightSignature is really very self-explanatory and easy to use.
The great part about utilizing RightSignature is that it will allow clients to sign as well as type information directly from their screens. Clients can sign their name with their finger, type their title underneath the signature, and also date the document just by clicking on a date from a calendar dropdown.
When attorneys require signatures from their clients, they can easily forward documents by email to them; the clients can then sign the documents directly from their computer or smartphone and then send the document back to the attorney, all in a short period of time.
An online tool like this can help speed up business interactions, save paper and increase the convenience factor for your clients.
HARVARD BUSINESS SERVICES, INC. IS NOT AFFILIATED WITH RIGHTSIGNATURE.
Business owners often form LLCs in Delaware in order to take advantage of Delaware’s sophisticated and superior corporate law structure. Delaware’s corporate law structure has been ranked first for a number of years based on its ability to provide the best protection for the members behind the LLC.
When a business is incorporated in Delaware, your company is considered domestic to Delaware and foreign to every other state. To obtain the authority to operate in your home state with a Delaware LLC, the company must typically be registered in your home state as a foreign entity.
This process is called Foreign Qualification. It is the way in which your home state gives you permission, or authority, to operate your Delaware LLC in that state.
Each state has different requirements for Foreign Qualification. Virginia, like most states, has an application process and a state fee for Virginia registration for a Delaware LLC.
The state of Virginia also requires additional documentation from your Delaware LLC. In addition to the application process and state fee, Virginia requires a Certified Copy of the Certificate of Formation, including all amendments that may have been filed.
Once your Delaware LLC is registered as a foreign entity in Virginia, you will be responsible for Virginia’s annual fee, in order to remain in good standing. A foreign LLC operating in Virginia will pay an annual fee of $50 per year.
Please keep in mind that once you register your Delaware LLC as a foreign entity in Virginia, you will still be responsible for the Delaware Registered Agent Fee as well as Delaware Franchise Tax in order to remain in good standing in Delaware.
If you have any questions regarding Foreign Qualification for your Delaware LLC in Virginia, please feel free to contact us at 1-800-345-2677, Ext. 6130.