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.