Summary of 10 Advanced LLC Operating Agreement
Provision Inserts

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PROVISION 1
Free Transferability of Membership Units to Family Members
EXPLANATION: Most standard operating agreements restrict the transfer of membership units by members to others without the approval of at least some percentage vote of all members. However, in some cases, the members may want to allow each member to be able to transfer his or her membership interests to a family member without requiring the approval of the other members. This provision allows for this.
 

PROVISION 2
Provisions Addressing Transfer of Units Upon Death of a Member
EXPLANATION: Most standard operating agreements do not address what happens upon the death of a Member and leave it up to the state laws to determine this issue. However, some LLC members like to address this in the LLC Operating Agreement or choose to change what the state statute says for their LLC.
 

PROVISION 3
Mandatory Indemnification Provision: Requires the LLC to Indemnify all Members and Managers who operate the LLC Business for expenses and liabilities associated with the LLC.
EXPLANATION: If you want your LLC to always cover the expenses and liabilities of a Member or Manager (or of all of them) in the event that Member or Manager is sued for activities conducted in the operations of the LLC, you can add this indemnification provision.
 

PROVISION 4
Right of First Refusal Provision
EXPLANATION: This gives the Members and then the LLC the right to step in the shoes of a buyer who is interested in buying the membership units of another Member desiring to sell his Membership Units.  The Standard provision in The LLC Expert Operating Agreement Form requires that Members need to vote on the ability for a Member to transfer his membership units to a third party. This is by far the most common provision because it is reasonable for the existing members to control who owns and has rights in the LLC (member compatibility).  However, some LLCs want to balance the above concern regarding member compatibility with the need of the members for liquidity (i.e., the ability to sell their ownership interests to obtain cash). This balance is usually addressed with a Right of First Refusal Provision
 

PROVISION 5
Drag Along Provision
EXPLANATION: This is an advanced LLC Operating Agreement provision which allows Members holding more than a majority of the Membership Units to require the other Members to sell their Membership Units to a third party. This provision is relevant if there is an intention to later sell the Company to a third party. If the majority of LLC owners want to sell, this provision allows them to require that the other Members to sell their Membership Units so that the entire company can be sold to a prospective buyer of the company.
 

PROVISION 6
Tag Along Provision
EXPLANATION: This is an advanced LLC Operating Agreement provision which allows any Member to require that his Membership Units be included in the sale by another Member to a third party.
 

PROVISION 7
Member Buy Sell Provision upon Disassociation of Member
EXPLANATION: This Buy Sell Provision requires that a Member sell his Membership Units to the other Members or to the LLC upon a disassociation event. This is a provision used to ensure that the Members of the LLC remain ones that are active and in good standing as it is commonly agreed upon by Members that a disassociation event is a reasonable event to trigger a buy sell provision.
 

PROVISION 8
Member Buy Sell Provision upon Dispute of Two Members
EXPLANATION: This Buy Sell Provision addresses deadlock situations in a two Member owned LLC. This provision forces the acquisition by one Member of the Membership Units of the second Member as a method for resolving a deadlock. This provision only applies if there are two members in an LLC and they have equal ownership and control or the LLC Operating Agreement otherwise requires the approval of both Members for an LLC decision. This provision is known as the Texas shotgun provision because one member can initiate a forced sale by offering a price to buy out the other member. The other Member then has the option to sell his Membership Units at the offered price or to purchase the other Member’s Membership Units at the offered price.
 

PROVISION 9
Arbitration Provision for Member Disputes
EXPLANATION: If Members have disputes among themselves related to their rights and obligations as Members and they cannot resolve the disputes, the next step is going to the legal courts. Filing lawsuits are very expensive and can take a long time. Arbitration can be a cheaper and quicker alternative to resolve disputes. This provision requires Member disputes to be resolved by arbitration.
 

PROVISION 10
Principal Tax Advisor Provision
EXPLANATION: If your LLC is going to be engaging in more advanced tax planning based on the advice of an advisor, it is sometimes preferred to have a principal tax advisor provision in the LLC Operating Agreement so the LLC has an agreed upon procedure for retaining an advisor in this important role.
 

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