If a member contributes property or something other than cash, the value of such contribution often gets negotiated. A member's capital contribution to the LLC may take the form of cash, property, services rendered, a promissory note, or some other obligation to contribute cash or property or to render services, or any combination of the foregoing. Initial percentage interests are determined based upon value given to initial capital contributions. An LLC can have non-voting interests, common interests, preferred interests, convertible interests, profits interests, etc. Given the flexible capital structure of LLCs, it is possible to create the equivalents of equity structures of partnerships or corporations. Some LLCs even refer to their units as “shares” and have an authorized and issued number of shares, just like in a corporation. Often, membership interest is expressed in units to give LLC’s equity more of the look and feel of stock. It is also important to remember that membership interest is comprised of two components: (i) an economic interest and (ii) a management interest. A member’s membership interest is often expressed as a percentage interest. The core elements of an LLC operating agreement include provisions relating to equity structure (contributions, capital accounts, allocations of profits, losses and distributions), management, voting, limitation on liability and indemnification, books and records, anti-dilution protections, if any, restrictions on transfer, buyouts, dissolution and liquidation, confidentiality and restrictive covenants, and general provisions such as governing law and dispute resolution. I strongly recommend every multi-member LLC to have a written operating agreement. This contract, called an operating agreement, is the centerpiece of each LLC.

As I said in my recent post about LLCs, the internal governance of LLCs is largely determined by contract among the LLC members.

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