Q. If my husband and
I are the only 2 members of the LLC, do we need a single member
or multi-member LLC Operating Agreement?
A. You and your husband are each treated as
a separate member and, thus, you would need a multi-member
LLC Operating Agreement?
Q. If I already have an address
in the state where I formed my LLC, can I use that address
for my Registered agent/Office?
A. Yes - the purpose of a registered agent/office is to accept
any process, notice, or demand required or permitted by law
to served upon the LLC.
Q. If I am the
only owner of the LLC, do I really need an Operating Agreement?
A. Yes - . Without the formality of an Operating Agreement,
the LLC can closely resemble a sole proprietorship, which
does not limit your personal liability for business debts
of the LLC.
Q. Should I
form my LLC before I get an Operating Agreement?
A. You may get an Operating Agreement either before or after
forming your LLC. In general, one is not required to have
formed an LLC prior to getting an Operating Agreement. In
fact, most attorneys tend to advise their clients to discuss
the business terms of their venture before forming their entity.
Q. Can I use a standard LLC
Operating Agreement for a Self-Directed IRA?
A. No – A self directed IRA LLC Operating Agreement
should include special tax provisions relating to “Investment
Retirement Accounts” and “Prohibited Transactions”
pursuant to Internal Revenue Code Sections 408 and 4975. In
addition, since the LLC will be managed by a manager and not
the member, the Operating Agreement would need to include
special management provisions.
Q. What are Capital Accounts and why are they so important?
They seem to be referenced in all Operating Agreements I have
seen but I really don’t understand their significance?
A. The taxation of LLCs cannot be understood without a rudimentary
understanding of capital accounts. The total members’
equity in the LLC is expressed as the “capital accounts”
of the members. Each member of an LLC has a separate capital
account that represents the equity that member has in the
LLC. A member’s share of equity is the amount he/she
would receive if the LLC was liquidated and all of the assets
were sold at their book value, all liabilities paid, and the
net proceeds distributed. As the LLC carries on the trade
or business, these capital accounts will change depending
on how the members agree to share in the net profits and net
losses of the LLC.
Beginning Capital Account Balance:
+ Additional cash and property (at fair market value) contributed
by member
+ Allocations of LLC income or gain
+ Allocations of LLC tax exempt income
- Cash distributed to the member
- Fair market value of property distributed to member net
of liabilities secured by the property
- Allocations of nondeductible LLC expenses
- Allocations of LLC losses and deductions
= Book Capital Account Balance at the End of the Year
For example, Steve and Jane form an LLC. Steve
and Jane will each have a 50% interest in the LLC. Steve contributes
$100 and Jane contributes property with a basis of $50 and
a fair market value of $100. Accordingly, Steve and Jane would
each have a capital account balance of $100. If in year 1
the LLC generated $50 of profits, Steve and Jane’s capital
account (equity in the LLC) would be increased to $125 respectively
(Steve and Jane’s capital account is increased by the
$25 of LLC profits they were allocated). In year 2, if the
LLC generated a $20 loss, Steve and Jane’s capital account
would be reduced by $10 respectively bringing their capital
account (equity in the LLC) to $115 respectively.
In general, most discussions involving the financial accounting
of an LLC will focus upon capital accounts. At any point in
time, these accounts reflect the financial relationship among
the members and the adjustments to these accounts reflect
the manner in which the members have agreed to share the profits
and losses from their venture. The capital accounts, if properly
kept, reflect the current state of the economic deal among
the members.
