We hope that you are coping during these uncertain times.
It is important to review each Operating Agreement each year; especially since there has been new rules that have been passed that affect certain aspects of the agreement. Below is a list of some items to help you review the agreement:
- Ensure that the new Partnership Representative (PR) required wording is stated in the agreement; including but limited to rights and duties of the PR. The IRS recently replaced the Tax Matters Partner requirements with the Partnership Representative requirements so most agreements should be revised to update the tax section.
- Consider including a buy/sell agreement which can serve to remind you and your co-owners how you agreed to handle the sale or buyback of any ownership interest when one member’s circumstances change.
- In an LLC, whether to be operated by a board or by multiple managers must be selected in order to avoid a patent ambiguity in the agreement. Also, a well-crafted Operating Agreement must address if the board members are allowed to vote by proxy.
- In view of the recent events due to COVID-19, companies should also review their Operating Agreement to ensure it does not prohibit virtual meetings. In addition, companies should review their agreement for any restrictions or particular processes that must be followed in order to authorize a virtual meeting. For instance, some companies may require board approval of the virtual meeting format.
- An Operating Agreement can include the requirement of an annual meeting. During these meetings it can be discussed in detail how the company will be ran, how management will work, and how certain issues and disputes will be handled which all aids in maintaining a health company.
- If you converted your entity from an LLC/Partnership to an S-Corp, you should review/revise your agreement to ensure to satisfies the S-Corporation rules under the Internal Revenue Code. An example would the one class of stock requirement for S-Corporations.
- Especially if any of the following have happened, it is imperative to review and potentially revise your Operating Agreement:
- A new member is added or a current member leaves;
- The timing of the distributions changes;
- You want to change the percentage allocation of the distributions;
- You add more capital to the business;
- You change your governance from member-managed to manager-managed (or vice versa); or
- You make any other managerial/financial changes that are spelled out in the original Operating Agreement.
We are always here to help you, so if you have questions regarding any of these items, please give us a call. We also have the legal expertise to revise any existing Operating Agreements.
Jeffrey D. Cohen Esq., C.P.A.