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Price: $69.95
Revised: November 2012 - 32 pages
Description:
Form 3.3 is an operating agreement for a limited liability company that engages in the practice of law, accounting, medicine, engineering, architecture, or other profession.
Operating agreements for these entities differ from those for businesses generally in a number of respects. First, capital is generally not a significant income-producing factor; the LLC’s revenue depends on the amount and type of personal services rendered and the professional reputation of its members. As a result, members’ shares of a professional LLC’s profits are generally tied to their contributions to the firm’s income, and their capital contributions are given little weight or ignored entirely. Profit-sharing percentages frequently change annually. In addition, the lack of capital affects the valuation of members’ interests under an operating agreement’s buy-sell provisions. The value may be limited to a proportionate share of the LLC’s accounts receivable and work in progress.
Second, professional LLC operating agreements typically require a monthly or more frequent distribution of a significant share of its profits in order to allow members to pay their living expenses. Because capital is relatively unimportant, accumulating cash for capital expenditures is unnecessary. In contrast, operating agreements for other businesses may only require that profits be distributed annually, to the extent necessary to enable members to pay taxes on their shares of the LLC’s income.
Third, operating agreements for LLCs engaged in professional practice often contain provisions that one might expect would be in employment agreements. These provisions deal with such things as expense reimbursement, vacations, and sick leave.
Fourth, because the success of a professional LLC is highly dependent on its goodwill, which in turn depends on the standing of its members in the community and profession, professional LLC operating agreements are likely to contain greater restrictions on transfer of members’ interest than operating agreements for LLCs engaged in other businesses. All transfers of members’ interests may be prohibited, which is unlike other operating agreements that generally allow transfers to be made subject to the rights of the LLC or other members under a buy-sell agreement arrangement that may give them a right of first refusal.
Fifth, because of potential malpractice exposure, professional LLC operating agreements generally give greater attention to the allocation of liabilities between members than is given in operating agreements for LLCs engaged in other businesses.
Sixth, a professional LLC’s operating agreement can control the taxation of payments made to retired and deceased members. In the context of other businesses in which capital is a significant income-producing factor, a purchase of a member’s interest by the LLC results in the member’s having capital gains. The purchase of a retired or deceased partner’s interest in a professional LLC may also involve capital gains, but it’s possible to structure the purchase so that at least part of the price is ordinary income to the selling partner. If this is done, the amount of LLC income on which the other members are taxed is reduced.
Seventh, professional LLCs are often managed by their members, but their operating agreements may provide for naming one of the members to be a managing member with authority to deal with day-to-day matters. This allows all members to participate in major decisions, while limiting the number of members who must take time away from their practices to attend to minor issues. A managing member arrangement can also be used by LLCs that are not involved in a professional practice, but they are less common, presumably because the value of members’ time devoted to management is less clear. In addition, members of LLCs involved in other businesses may be more willing to forego all management authority by having the LLC operated by managers.
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