Tuesday, September 13, 2011

Penny Wise Pound Foolish: Have A Lawyer Draft Your LLC Documents (Part 4)

Can you have different classes of members in an Limited Liability Company under New York Law.  The short answer is YES.  The longer answer is still "Yes", but generally a form Operating Agreement will not provide a mechanism to create more than one class of members.  Again, this is why it is important to engage an experienced business attorney prior to formation of the LLC.  

Entrepreneurs should understand that an LLC is a very flexible business structure giving its members the opportunity to vary both management and financial rights through the Operating Agreement.  Often, potential partners fail to recognize that not all membership interests need to be created equally.  In fact, the Operating Agreement is the mechanism for formulating membership rights reflectling a member's contribution (monetary or otherwise) to the business.  For example, the Operating Agreement can include the creation of different classes of membership interests (like the by laws of a corporation) which vary not only the economic rights of a member but also limit or expand voting rights.  

The fact that New York allows substantial flexibility in drafting the Operating Agreement is important because:

  • A new business can be established with partners whose interest in the LLC reflects not just monetary but other contributions (f.e., sweat equity); and
  • As the business develops the LLC can use its equity interests to raise funds without automatically sacrificing management control (if the investor is willing to agree).
As always, don't be Penny Wise and Pound Foolish.  Consult an experienced business attorney prior to starting your business. 

Membership Interests, Operating Agreement; Operating Agreement; LLC

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