Disclaimer – this page meant to convey the intent of our standard LLC operating agreement. Because changes are made to the document over time, be sure to go over the details with your attorney.
PWLLC maintains a portfolio of companies that it manages. PWLLC hires and directs the teams and projects used to execute site improvement and operations plans for the various companies in the portfolio.
Managed companies can consist of several domains, e-commerce stores, sites, micro sites, blogs, social accounts, campaigns, etc., that are part of the overall business.
The companies that PWLLC manages are legal entities in and of themselves, separate from PWLLC. Having separate company entities makes it simpler to handle the various investment, management, distribution and tax reporting functions.
The LLC form was chosen as it provides liability protection, pass-through tax advantages and the ability to affect a fair and balanced treatment for all who choose to join.
Any company we manage will be formed as an LLC that is based on a well-thought out standard operating agreement. The operating agreement defines all equity interest holders as members. Membership is expressed as a percentage of the whole. The LLC itself is managed internally by one of its members and thus is termed a member-managed LLC.
Voting versus Non-Voting Members
Membership is divided into voting versus non-voting status. Members with voting rights may cast a vote when a fundamental matter (see below) is being decided.
The Managing Member
Any managed company will have a designated managing manager. This person is responsible for the day to day decision making as well as longer term planning and execution. This person is appointed by the voting members of the managed company.
Fundamental Matters Require a Super-Majority
The managing member has authority to perform most decision making duties. When fundamental matters have to be decided, however, a super-majority vote is required. This is usually a ⅔ majority but it can differ by company.
Here are the fundamental matters requiring super-majority approval:
- any changes to the operating agreement
- any agreement changes with the managing member himself or relative thereof
- admission of additional members
- transfer of membership interests by a voting member
- transfer of less than all membership interests by a member
- designating a priority member
- transferring or selling the company
- liquidating or dissolving the company
- filing for bankruptcy
- mergers or consolidations
- converting to another entity type
The managing member may decide to make a capital call of all existing members at any time. Members are not required to meet that call– it is not an obligation. Those members that do respond will of course own a larger proportion of the company afterward.
When someone is granted a new interest, existing members will experience a dilution of their interest with respect to the whole of the managed company. Any member has the right, however, to buy additional interests to preserve their interest percentage.
A profits interest can be granted. This mechanism works like a ISO stock option where the receiving member has the right to share in future profits of the company. It is the chief way that technical talent and service providers can acquire equity in a managed company.
A priority return can be granted. This mechanism works to set a member (usually an investor) at the head of the line when distributions are made. Typically a priority return is used to return capital back to a later stage investor ahead of all other members. Priority return stipulations are typically retired once that capital has been repaid.
A guaranteed payment can be granted. This is essentially a payable. It is granted in lieu of a salary or service provider fee.
The managing member has the right to declare distributions at least annually. The managing member has the right to retain earnings for reinvestment as is specified in the operations or improvement plans.
Distributions follow this charging order:
- First to priority members
- Second to members to cover un-returned capital contributions
- Third in proportion to members allocation percentages including profits interests
Profits interests are subject to “Threshold Amount Profits Interest” to prevent specific type of payout prohibited by Treasury regulations.
Capital (Cash) Accounts
Capital accounts are maintained to reflect the cash contributed by each member and the balance of same as distributions are made over time. Both book and tax capital accounts are maintained.
Partnership for Tax Purposes Only
Managed companies are all reported to the IRS as tax-advantaged partnerships. This means members will receive tax statements stating their share of profits and losses. The operating agreement specifically states that members will be made whole (in tax terms) should a tax statement result in a tax liability without corresponding distribution(s) made in that year.
Non-Voting Members Right To Sell
Non-voting members have the right to sell their share to anyone they chose as long as they sell the entirety of their interest. Members who want to sell a portion of their interest (for example, to each of three children) must obtain voting member approval.
Voting Members Right To Sell
Voting members must obtain super-majority permission to sell their voting interest. If that is not granted, voting members may convert their entire interest to non-voting status and then sell subject to the non-voting interest rules.
Deadlock – Buy Sell Agreements
If the voting members cannot agree on a fundamental matter, such that an impasse has occurred, one of the voting members may initiate a buy/sell procedure with one other voting member. Only one such deadlock proceeding can take place at a time. The intent is to procedurally push one or another voting member out of the company to resolve the impasse.
Mediation / Arbitration
Matters should be resolved out of court. Managed company members are expected to abide by this maxim. The operating agreement calls for mediation and then arbitration proceeding that are binding to resolve issues fairly and efficiently.
Operating Agreement In Detail
If you are thinking about joining us, please contact us to receive a copy of the full operating agreement.