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Need and answer now please! In an operating agreement in…

Need and answer now please...
Need and answer now please!

In an operating agreement in an LLC, how would you write that any proposed sale or assignment of a membership interest of the company has to be approved by the majority membership, meaning a majority ownership membership? So, for example, if one person owns 51% of the LLC, you would need their approval, even if the other 3 members allow the sale/assignment?

I understand you have to put in a provision for a buy-out, if the member wants out, but that aside, how would I write the above?
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Answered in 4 minutes by:
6/11/2013
CalAttorney2
CalAttorney2, Attorney
Category: Legal
Satisfied Customers: 10,244
Experience: Civil litigation attorney for individuals and businesses.
Verified

William B. Esq. :

Dear Customer, thank you for choosing Just Answer. I would like to assist you with your legal question today.

Customer:

Great! Thanks!

William B. Esq. :

While I cannot draft your proposed provision, the language that you have used in your post today is clear and by using that as part of your operating agreement you can make the provision clear and concise. Making sale of shares contingent upon approval of a majority ownership interest as measured by shares is common, and you can refer to the buy-out provision in the event of a dispute.

William B. Esq. :

I recommend using "plain language" as the use of complex or "legalese" terms leads to confusion and the intent of the parties is lost. If you believe there may be some issue in the future, you can include a short "statement of intent" in the provision in which you give the intent of the clause, this statement will be used in interpreting the terms in the event of a dispute.

Customer:

Ok thank you. That is helpful.

Customer:

Basically, I'm trying to create an operating agreement for an LLC i'd like to create. Essentially, I want to maintain complete control of the LLC, while allowing my employees to have some interest in the company. The first issue I'm running into is that I want to be able to make sure they do not sell their membership interest. It seems like adding a provision we just discussed should do the trick?

Customer:

Also, I want their interest to be contingent upon their employment. Would it be legal if I added the following provision:

William B. Esq. :

That type of provision will limit their ability to sell their shares, you cannot completely prevent this or the ownership interest by the employees would be entirely without value,but yes, it would restrict their ability to sell, and it would give you control.

Customer:

FORFEITURE OF INTEREST. Notwithstanding anything herein to the contrary, if the member is also an employee of the Company, at any time prior to the end of the last day of the 60th calendar month following the effective date of their Employment Agreement, and the employment of any employee terminates for any reason other than as the result of death or permanent disability, then that percentage of the entire ownership interest owned or controlled by such person shall be forfeited (“Forfeited Interest”). Upon such termination, the applicable person shall forfeit the entire Forfeited Interest and with respect to such Forfeited Interest, withdraw from the Company, and the Company shall release, acquit and forever discharge such withdrawing party from and against any and all obligations to the Company in connection with the Forfeited Interest.

William B. Esq. :

I believe the clause would be enforceable, there is nothing against public policy with the terms, but you cannot tie the employee's compensation into the ownership structure with this type of restriction.

William B. Esq. :

If you want to structure this into a retirement format where you can defer employee's interest, you would need to speak with a retirement adviser as this is much more complex.

Customer:

I'm sorry I don't follow... what do you mean by not being able to tie the employee's compensation into the ownership structure?

Customer:

The idea is in case the LLC gets bought out by some big company, the employees will get something as they hold a membership interest...

William B. Esq. :

I understand that, but how do you plan on giving the employees their interest in the LLC (what do they do to earn it, or is it a gift?)

Customer:

I just imagined it was part of their employment agreement. The thought was every year they stay on, they get 1% of the membership interest up to 5 years, this is on top of what I would give them as a salary...

William B. Esq. :

That is part of their salary, you cannot have them forfeit their interest when they resign or leave the company. They are still stuck with the restrictions on sale, but you cannot pull their interest as that becomes their property.

Customer:

So once I give it to them, I can't take it away?

William B. Esq. :

Correct.

Customer:

I can write in the operating agreement that the majority ownership interest can force a forfeiture, though right?

Customer:

Or can I only force a withdrawal, which, to my understanding, I'll have to pay them for their interest...?

William B. Esq. :

No, you can write a clause where the majority has the right to buy out the minority members, but you would have to craft it so that the minority members get a fair market value for their shares.

Customer:

That makes sense... instead of giving them their share up front, can I say that after they have worked for 60 months, they will get 5% of the LLC?

William B. Esq. :

Yes. No problem.

Customer:

But that has to be in the employment agreement, the operating agreement would say nothing about that, correct?

William B. Esq. :

Yes, but there is no problem with it being in the operating agreement (it is just duplicative).

Customer:

So the forfeiture of interest clause I wrote above wouldn't work, because I can't force them to forfeit their interest once I've given it to them?

Customer:

So is there any way to structure an agreement with my employees that gives them 1% interest in the LLC, but I can take it back (without paying just compensation) if they leave before 5 years?

Customer:

hello?

Customer:

I don't see an answer. I'm sorry my cpu's been running slow, I'll try to log out and log back in...

Customer:

Hello?

CalAttorney2
CalAttorney2, Attorney
Category: Legal
Satisfied Customers: 10,244
Experience: Civil litigation attorney for individuals and businesses.
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Dear Customer,

It appears that we were cutoff. I would recommend that you repost this specific question to our employment law experts as most financial transfers from an employer to an employee are considered compensation for work being performed and are governed by the respective state and federal labor codes (you cannot take back earnings from an employee).

But you can structure a vesting period so that your employee must work a certain number of months before their interest is vested.
CalAttorney2
CalAttorney2, Attorney
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Experience: Civil litigation attorney for individuals and businesses.
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