Do I really need a written LLC Agreement?

For a variety of valid reasons, many SCORE clients make the decision to form a Limited Liability Company (LLC) for their new business. This company form offers the limited personal liability protection of a standard C or S corporation with the tax advantages of an S corporation without the excess costs and reporting burdens imposed by a C or S corporation. Mainly, these LLCs are sole owner companies.

Often, however, clients want to form an LLC with one or more associate(s). In many cases, the associate is a friend or a close relative such as a spouse. In all cases when clients want to form a multiple member LLC, SCORE counselors urge them strongly to enter in advance into a written Membership Agreement reviewed by an attorney competent in such matters. It should be noted that a Membership Agreement is a different document than an LLC Operating Agreement which is a required legal document by both the State of the LLC’s formation and the IRS. Although, the terms of a Membership Agreement could be incorporated into the Operating Agreement, it is preferable that it be a standalone agreement.

The purpose of the Membership Agreement is to be explicit as to the purpose of the business, the capital contribution and ownership percentage of each member and the allocation of management responsibilities: contracting, hiring and firing, purchasing, signing checks, entering into agreements, and other matters of mutual interest. The agreement can designate one or more of the members for each function and can also designate that, for some transactions more than one member’s agreement is required. Also, the Agreement details the dissolution of the business and the exit strategy from the LLC for the members in the event, for whatever reason one of them or their heirs/assigns wants to opt out. Clients are sometimes reluctant to enter into a Membership Agreement with a close friend or relative under the mistaken theory that it might be an insult, is culturally taboo or the members are very close and such an agreement is unnecessary. These are not valid reasons and there should always be a Membership Agreement irrespective of the personal or familial relationship between/among the members.

Contributors to this Ask SCORE column were Larry Pollack and Bill Litchman


Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties