Section 2: Going Deeper into LLCs

Introduction and How to Use These Resources

With an initial decision in hand to form an LLC, farmers need to know exactly what it takes to form one. How does a person set up the LLC? What documents need to be filed and with whom? What should be included in the operating agreement? This section is filled with hands-on tools to help guide you through the process of creating and maintaining an LLC as well as preparing your farm LLC’s operating agreement.

The Checklist: Creating an LLC sketches the basic process a farmer follows to form and organize an LLC; it’s designed to help farmers understand the big picture as they comply with the laws and outfit their farm for success. It’s best to start with the checklist to get a sense of what will be required.

The sample Brief Operating Agreement for Happy Couple Farm, LLC includes the foundational provisions that are particularly important for a married couple LLC. It presumes that the couple’s communication and working relationship are relatively good. It also assumes that if the couple divorces, marital or family law may dictate the division of assets to a certain extent, aside from what an operating agreement might require. So the provisions are not as elaborate as some operating agreements. If you think that you will eventually take on new business partners outside your family, you may want to take a look at the sample Extensive Operating Agreement for Sun Sisters Farm, LLC. This extensive agreement provides more elaborate provisions to handle various scenarios that may arise in an LLC with members of diverse backgrounds and interests who may come and go. These sample operating agreements serve as examples of the ways a farm operation may want to handle certain situations should they arise. The annotations provide even more ideas.

Rather than simply adopting someone else’s operating agreement, including any of the sample agreements in this section, it’s best to take the time to think through the various issues and craft an agreement that is best for your particular farm operation. The Checklist: Preparing Your Farm’s LLC Operating Agreement will guide you through that process. It’s filled with questions to illicit the best result that is specific to your situation. You can either take your answers to an attorney, who will then be able to efficiently draft your operating agreement, or you can take a crack at drafting it yourself using the sample agreements as a guide. Either way, Farm Commons advises that you have an attorney familiar with the laws in your state look it over before it is finalized. This will ensure that it complies with your state’s corporation statute and that there are no conflicting provisions within the bylaws, which would only lead to confusion down the road.

Finally, while LLCs are generally not required to hold annual meetings, it is a good practice to do so anyway. Annual member meetings offer an opportunity for the members to get together and review the financials and strategize for the upcoming year. They help foster open communication and engagement from the membership. If you do hold annual member meetings, it’s best to keep minutes to evidence what happened should a dispute or issue arise. In addition, if your LLC chooses to elect S corporation tax status, the IRS will require you to hold annual member meetings and take minutes. The sample Annual Member Meeting Minutes with Annotations included in this section illustrate how straightforward it is to take minutes. You can use these to guide you through the process should you decide or be required to hold annual member meetings.

Checklist: Creating a Farm Business as an LLC With S Corporation Tax Status Option

Introduction

This checklist guides farmers who have made the careful decision to establish their farm operation as an LLC. Each state may have different requirements, since LLCs are a matter of state law. The LLC business entity can help farmers create clear decision-making procedures, outline responsibilities, plan an exit strategy and manage potential liability. Some of these benefits come from legal best practices such as writing an operating agreement, a step not required in every state. This checklist is designed to help famers understand the big picture as they comply with their state’s LLC laws and gear their farm for success. Read beyond our summary checklist for more information on each step.

Summary Checklist

Establish the LLC

• Draft and file the articles of organization
• Get an Employer Identification Number (EIN) if you need one

Implement Best Practices

• Draft and sign an operating agreement
• Follow the operating agreement
• Allocate assets between personal and business ownership
• Document relationships for personal assets used for farm purposes
• Update websites, brochures, invoices, order forms and other materials with the “LLC” designation, if required
• Keep accurate and up-to-date accounting records for tax purposes
  Make note of and follow any annual obligations such as when, where and how to file your annual report or fee with the state

Optional: Elect S Corporation Federal Tax Status

• Elect S corporation tax status with the IRS
• Make note of and follow any annual obligations to maintain S corporation tax status

Checklist with Explanations

Establish the LLC

• Draft and file the articles of organization

Each state requires that an LLC file a document titled “articles of organization.” Legally speaking, the articles of organization are defined by state law, which specifies exactly what information must or may be included. To make it easier on business owners and the government agency processing the articles, many states provide fillable form articles of organization. Some states will require that the business use the form, while others will allow self-drafted articles. Some agencies don’t provide forms at all, and in that case, farmers should simply create a document with the information requested in the statute. Filing is generally handled by the state’s secretary of state office. An internet search should bring up a form and more information for your state.

The articles of organization will likely require you to list the business’s “registered agent.” A registered agent is appointed by the owners of the corporation to receive important legal and tax documents on behalf of the business before the business is officially incorporated, or recognized by the state. Most articles of organization also require listing the business’s street address and may require a listing of “members” and their contact information. Finally, the form may ask whether the entity is “member-managed” or “manager-managed.” Which one is your farm? It depends on who you determine has the authority to make day-to-day management decisions for the business (e.g., decisions related to managing employees, making small purchases, marketing, handling customer relations and so forth). If you want all members to make day-to-day decisions, you should designate member- managed. If you want only specific people to make those decisions, the farm must be manager-managed.

An LLC does not exist until the date its articles of organization are filed and then approved by the state agency. Approval can take anywhere from one day to one week from the time of filing. The form can generally be submitted online, along with the required fee. Each state charges different fees, which vary from $25 to $1,000. In addition, most states require an annual fee to maintain the LLC, which is generally less than the fee to create an LLC. Note that the information on the articles of organization may be changed at any time by filing amended articles.

• Get an Employer Identification Number (EIN) if you need one

An EIN is the number that the IRS uses to identify the tax accounts of employers and certain other business entities. Not all LLCs need an EIN. Again, this is because the IRS does not formally recognize LLCs as a separate entity for tax purposes and instead allows LLCs to choose how they wish to be taxed. LLCs can select to be taxed as corporations (C corporations or S corporations, as we’ll discuss in the upcoming chapters), general partnerships or sole proprietorships if there is only one member. LLCs choosing to be taxed as corporations or general partnerships need an EIN. Single-member LLCs need an EIN only if they have employees or if they choose a corporation tax treatment. Otherwise, a single- member LLC will handle all of the LLC’s tax issues by filing an individual tax return using his or her Social Security Number. So basically, you’ll need an EIN unless you are a single-member LLC that has no employees.

You can get an EIN immediately by applying online through the IRS website. If you prefer, you can download the Form SS-4 on the IRS website and fax your completed form to the service center for your state, and they will respond with a return fax in about one week. Some banks will refuse to issue bank accounts without an EIN, even if the IRS does not require the business to have one. In those cases, it can be easier to simply get the EIN than to argue with the bank about the necessity of the EIN.

Implement Best Practices

• Draft and sign an operating agreement

Although not required by most state laws, an operating agreement is highly recommended. The operating agreement lays out exactly who makes decisions for the farm. It outlines how members can enter the business, leave the business and receive distributions of profits. The agreement also allocates business profits and losses for tax purposes. If a farm does not have its own operating agreement, state law provides default rules. However, those rules may not be best for your particular farm business. The operating agreement is your chance to establish rules and procedures that work best for the farm operation’s individual situation.

Writing an operating agreement can be a very valuable process for farm operation owners, even if the state’s default rules will work perfectly well. The operating agreement is a chance to think through some very important contingencies. What happens if a farm partner dies? What if one partner wants to leave the business? What if you want to bring another partner on? These problems can cause massive disruption if people haven’t thought them through. The discussion process puts everyone on the same page and can serve to prevent disputes that often lead to crises.

Don’t forget to have all members sign the operating agreement and keep the signed copy in a safe place for your records.

• Follow the operating agreement

If you go through the work of outlining how the business should handle important matters like decisions, taxes and the departure of a member, it’s very important to follow the document. This gives the business legitimacy in court. And if you went to all that effort you should make it work for you.

• Allocate assets between personal and business ownership

As discussed above, a farm business needs to follow through on creating an LLC by making the division between business and personal. If the farm doesn’t already have a separate bank account, set one up. Farm expenses and payments should move through the farm account, only. Of course, if you forget the farm checkbook and use your personal bank card instead, you may pay yourself back.

Next, determine which assets are farm and which are personal. If there are multiple members and each has promised to make a capital contribution or investment in the LLC, each member needs to follow through with his or her promise. For example, if one member promised to invest $35,000 in cash, then that money needs to be deposited into the LLC’s bank account. If a member promised to invest his or her farm property, then the title of the property needs to be transferred to the LLC.

Overall, a common-sense allocation is probably the best route. This process can be quite simple–there’s no need to detail every feed scoop, hand weeder or trash bin. Making your best guess as to the value of the farm’s various assets and placing them on the farm’s balance sheet is a simple way to document the transfer. There is no need to get creative. If a farm tried to keep all assets personal and leave the farm with nothing, a court would likely not respect the LLC at all. The allocation must be based in reality and the farm must have enough assets to capitalize the operation.

• Document relationships for personal assets used for farm purposes

If you choose to hold ownership of the land with yourself personally, you should document the new relationship with the LLC. If the farm business uses your property, the farm business has a lease with you, whether one is written or not. Written documents are generally the better choice, and it can be a very simple one-page outline of basic terms such as rental rate, lease term and renewal procedures. Many individuals choose to lease the farmland for a rate equal to the value of the annual property taxes, but each farm has unique needs.

Now is a good time to discuss our objectives in allocating assets and writing leases. At any point in time, a court should be able to determine which assets are the farm’s and which are personal. This is because the farm’s creditors can go after business assets. Thus, we need to know what they are. The court should also be able to determine exactly how and why assets are used for both personal and business reasons. Your documentation can go a long way towards creating an efficient process. If records are a mess and there is no documentation, a court may decide for itself which assets are personal or business, in which case the farm loses an opportunity to influence the process.

• Update websites, brochures, invoices, order forms with the LLC designation

State statutes require that a limited liability company use the LLC designation in the name of the business. This signals to potential creditors that only business assets are available to satisfy potential judgments against the business. If you don’t like the look of the words or you’ve already invested in marketing materials, check with your secretary of state’s office about registering a trade name without the letters. In some states, the county register of deeds handles registration of trade names, so you may need to make a couple phone calls. For invoices and other official business, it’s best to include the letters after your name.

• Keep accurate and up-to-date accounting records for tax purposes

This includes maintaining an accurate profit and loss statement. While the LLC does not have to pay income taxes itself (unless it elects to be taxed as a C corporation or S corporation), each member will need to report his or her share of profits and losses on their individual tax returns. Keeping good accounting records throughout the year will help streamline this process for everyone and help the LLC manage its finances overall.

• Make note of and follow any annual obligations such as when, where and how to file your annual report or fee with the state

Your state will likely require you to file an annual report and pay an annual fee to maintain your LLC. If you neglect these duties, the state may dissolve your LLC. The IRS will also expect additional filings, even if you do not need to file a separate income tax return for the LLC. The actual filings will depend on whether you are a single-member LLC, have employees and have elected to be taxed as either a C corporation or S corporation. Talk with your accountant or tax preparer, or your secretary of state’s office and the IRS for more information on filing LLC taxes.

Optional: Elect S Corporation Federal Tax Status

• Elect S corporation tax status with the federal government

Electing S corporation tax status for an LLC is quite simple. You’ll first need to fill out and file IRS Form 8832, “Entity Classification Election.” Here, you’ll elect your preference to be taxed as a corporation. Once you do this, you will be taxed as a C corporation and unless you follow the next step, you’ll face the double taxation dilemma. Next, you will need to fill out and file with the IRS tax Form 2553, “Election by a Small Business Corporation.” The form should be completed up to two months and 15 days after the beginning of the tax year the election is going to take effect, or at any time during the tax year preceding the tax year it is to take effect. This sounds complicated but the IRS provides examples of how the timing works in the instruction sheet for Form 2553.

• Make note of and follow any annual obligations to maintain the S corporation tax status

These include filing annual tax documents with the IRS and holding annual meetings. As an S corporation, you’ll have to file the annual Form 1120S with the IRS. This is an informational tax document used to report the LLC’s income and losses and any profits given to its members (i.e., distributions). In addition, you will have to provide each of the LLC’s members with a Schedule K-1. The Schedule K-1 is similar to a W-2, the end-of-year wage statement that employees receive from their employers. The Schedule K-1 shows the self-employment income each of the owners receives from the company. The LLC must also submit a copy of Schedule K-1 to the IRS for each LLC member.

While many states don’t require LLCs to do so, the IRS requires that an S corporation hold an annual meeting. You’ll need to follow the parameters for holding the annual meeting as set forth in your operating agreement (i.e., holding it during the month or season stated and providing the required notice to members). Be sure to also take minutes to record what happens at the meetings.

Sample Brief LLC Operating Agreement with Annotations

Happy Couple Farm, LLC | Operating Agreement¹

This Operating Agreement (the “Agreement”) of Happy Couple Farm, LLC (the “Company”) is entered into as of the date on the signature page by Jackie Farmer and Pat Farmer (collectively, the “Members,”² and individually, a “Member”)³ for the purpose of making the acknowledgment at the end of this Agreement.

¹ No matter how well you and your spouse get along, it’s a good idea to create an operating agreement upon forming an LLC for your farm business. The operating agreement outlines how the LLC is to operate. This is important because operating in accordance with an operating agreement proves that you both are earning the LLC’s liability protection. Plus, if you don’t have an agreement, state law will fill in the blanks as necessary. The default provisions provided by state law may not be suitable for your farm operation. The operating agreement gives you and your spouse the opportunity to write your own rules. Moreover, it allows you to set more favorable ground rules in your relations with third parties. The operating agreement may not seem to matter much for a couple that has a close working relationship. They could agree on each of the issues addressed here in a casual conversation and that may be good enough. However, if it’s not written down in an operating agreement, it won’t govern anyone else who was not a part of that conversation. For example, let’s say a creditor comes after one of the spouses and takes control of their LLC interest. The creditor must follow the operating agreement, which could say that such a creditor would have no voting rights. This Brief Operating Agreement for Happy Couple Farm, LLC includes the foundational provisions that are particularly important for a married couple LLC. It presumes that the couple’s communication and working relationship are relatively good. This Brief Operating Agreement assumes that if the couple divorces, marital or family law may dictate the division of assets to a certain extent, aside from what an operating agreement might require. So the provisions are not as elaborate as some operating agreements. If you think that you will eventually take on new business partners outside your family, you may want to take a look at Farm Commons’ Extensive Operating Agreement for Sun Sisters Farm, LLC. This operating agreement is for a Wisconsin business. If you use it as a starting point, be sure to make necessary changes to reflect your state.

² “Members” means the same thing as “owners.” Because LLC law uses members, we do too.

³ Married couples that live in specific states may choose to form their LLC with one member–the married couple as a single unit. This option is available to couples in states that adopt “community property” systems. The nature of community property is way beyond our scope here! To summarize, some married couples may want to form a single- member LLC for tax reasons. Married couples in community property states should talk with their accountant or tax preparer about their options. If you were to form a single-member LLC as a married couple, you should still consider creating an operating agreement. As explained above, the operating agreement helps address matters with third parties and also provides the procedure for shutting down the business. Note that in our story, Jackie and Pat have decided to form a multi-member LLC even though they live in a community property state. Again, check with your attorney to find out what’s best for you.

Article 1: Business Purpose and Term of Company

Section 1.1: Purpose⁶
The purpose of the Company shall be to operate a farm business and to do any and all things necessary, convenient, or incidental to that purpose and to conduct any other lawful business. 

Section 1.2: Term
Unless dissolved earlier under the terms of this Agreement, the term of the Company shall be perpetual.

⁶ This section is not legally necessary. It’s an opportunity for owners to incorporate the business purpose into the legal structure of the farm. The purpose can be binding in that an action taken by a member in opposition to the business purpose could be invalid. But, the phrase “... and to conduct any other lawful business” takes any teeth out of the purpose. Many farmers like incorporating a purpose into the operating agreement because it feels good to remind owners why they farm in the first place.

Section 1.3: Additional Members

Additional Members may be added upon the unanimous consent of the existing Members, except as permitted by Section 5.2.⁷

⁷ This provision basically allows you to bring on new members if both you and your spouse agree. However, one exception applies here. Section 5.2 provides that one spouse can transfer some or all of his or her interest to a child or grandchild without the consent of the other. This simplifies matters in times of death of one spouse or, potentially, divorce. Basically, each spouse can determine how to divvy up his or her interest in the company to the children or grandchildren. This is just one way of doing it. You could require unanimous consent for all transfers.

Article 2: Capital Contributions

Section 2.1: Initial Capital Contribution and Percentage Interest⁸
The Members shall contribute the amounts set forth on Exhibit B, attached to this Agreement and incorporated herein, as their initial capital contributions.⁹ The initial capital contributions shall initially entitle them to the Percentage Interests set forth on Exhibit B. The “Percentage Interests” is determined by dividing the Member’s contribution by all contributions to the Company.¹⁰ The Members agree to the amount and value of the Capital Contributions. “Capital Contributions” as subsequently used is defined to include any subsequent Capital Contributions added to the initial capital contributions.

⁸ “Capital Contributions” are the assets each member contributes to the LLC. Assets contributed can be cash, equipment, services and other things of value. (Note that we strongly urge you to see an attorney or accountant before you contribute services because there are tax implications). The section on Capital Contributions is important for several reasons. First, although an LLC provides protection for personal assets, assets contributed to the LLC are no longer personal. In effect, members are liable for the LLC’s debts to the extent that each has contributed to the LLC. That’s why it’s important to get the exact contribution in writing now and into the future. In addition, an LLC needs to be adequately capitalized to be legally legitimate. How much capital do you need? Common sense suggests that you need enough to pay bills as they come due. If you can do that with cash flow from revenue, you may not need much capital.

Of note, we need to make a distinction between a capital contribution and a loan, lease or sale. You can loan your LLC cash, or sell or lease your LLC land or equipment. None of these situations is considered a capital contribution. For example, a member could loan the LLC a total of $1,000 for the opening bank account balance. This could cover the business until cash flow is sufficient to pay the member back. Unlike a capital contribution, the member has a right to be paid back for the loan. Of course, if the business folds, the business may need to pay off other creditors first and the member could end up losing that money in the end. Also, a member can sell or lease the LLC physical assets such as land or equipment rather than give the physical assets as a capital contribution. Loans, sales and leases should all be separately documented.

So now you must ask yourself: Exactly what capitalization and contribution arrangement is best for your farm operation? It will depend on several factors: costs of starting up the farm, expected cash flow, expected expenses, expected revenue and more. Contributions, expenses and revenue all determine income at the end of the year, which determines the members’ tax obligations. This subject can be quite detailed. Bringing the farm business plan to an accountant is the quickest way to get answers to these questions. Also, bear in mind that farmers can make additional capital contributions, which may change the percentage interest breakdown, so the initial decision isn’t necessarily set in stone.

⁹ Each member must officially transfer whatever capital contribution they have promised. If they agree to contribute cash, they will need to deposit the cash in the LLC’s bank account. If they agree to contribute land, they will need to transfer the title of the land to the LLC.

¹⁰ The “Percentage Interest” is the LLC way of saying “percentage of ownership.” Basically this section boils down to if you contribute half the capital to the entity, you get half ownership. The percentage interest of all the members together will always equal 100 percent. It is possible for LLC members to allocate ownership in percentages that are not equal to capital contributions, but that subjects everyone to more complicated tax rules. Don’t do that without consulting an attorney and accountant. As this agreement is written, the percentage interest breakdown in the company determines the weight of each member’s vote. If one member has 60 percent percentage interest, then his or her vote will count 60 percent, or an automatic majority. Another option would be to make it one person, one vote so that each member’s vote carries the same weight despite the percentage interest breakdown. Yet another option would be to tier the membership interests, which could include voting members and non-voting members. Incidentally, this agreement usually requires unanimous consent, so it wouldn’t really matter.

Section 2.2: Future Capital Contributions by Members¹¹

The Members shall not be required to make any additional Capital Contributions or loans to the Company. Any future Capital Contributions by Members shall be approved in amount and in valuation method by unanimous consent of the Members and recorded on Exhibit B.¹²

¹¹ Because a capital contribution is the member’s exposure to liability, as explained in footnote 8, this section specifically states that members are not required to contribute additional resources. Generally, a member wants to limit the total contributions to the LLC. As long as the LLC has positive cash flow and can reasonably be expected to pay all of its bills, members might consider making loans to the LLC for ongoing needs. This is illustrated in our example above with the $1,000 cash loan to the LLC from Jackie and Pat. However, some LLCs may want to require future or ongoing capital contributions. This could happen if the members expect that the farm operation will undergo a significant expansion and bank loans would not be an option or desired. If members require ongoing or future capital contributions, the members should have more complex rules including penalties or policies for default if a member fails to make the required contribution.

¹² Exhibit B needs to be actively maintained if you add any more capital in the future. This is because Section 3.1 states that profits and losses are distributed according to Exhibit B. The modification of Exhibit B is an amendment to the operating agreement, so the approval of all members and recording of the change are required. You should update Exhibit B as soon as you give the business money. However, it can also be done at tax time, when you have the whole picture at hand. Either way, it’s a good idea to have your accountant or tax attorney review any changes you make and go over any tax implications. Again, as mentioned in the footnotes above and illustrated in the example, a person can loan personal money to an LLC. However, loans do not go on Exhibit B, because they are not a capital contribution.

Section 2.3: Future Capital Contributions by Additional Members

Any future Capital Contributions by Additional Members shall be approved in amount and in valuation method by unanimous consent of the existing Members and recorded on Exhibit B.¹³

¹³ If new members are added, they may be required to invest or make a capital contribution to entitle them to a percentage interest or ownership share in the company. Another option for adding new members would be to transfer interests from existing members. This is addressed in Section 5. Either way, the percentage interest will always equal 100 percent and must always be recorded on Exhibit B.

Section 2.4: Capital Accounts

A capital account¹⁴ shall be maintained for each Member, which shall be credited with: (1) the Member’s Capital Contributions, (2) the Member’s allocable share of profits, and (3) the amount of any debt of the Company that is assumed by the Member or that is secured by any property distributed to the Member. The capital account shall be debited with: (1) the amount of cash and the asset value of any property distributed to the Member, (2) the Member’s allocable share of losses, and (3) the amount of any debt of the Member that is assumed by the Company or secured by any property contributed by the Member to the Company.¹⁵

¹⁴ The capital account is a line item account. It exists on a spreadsheet or in a QuickBooks file, for example. It’s not a bank account. The capital account is maintained for tax purposes. This section outlines the basic procedures, which are also outlined in federal tax law. Very detailed capital account regulations are at Treasury Regulations 1.704-1(b)(2)(ii)(b)(1), (b)(2)(iv). If you file your own taxes, you will need to know these basics. If you work with an accountant or tax preparer, they should know these procedures.

¹⁵ To summarize, a member’s “stake” in the LLC is the total of what the person puts in, the member’s share of the profits and the value of any debt the member personally takes over from the LLC. A member’s stake is reduced by any property the LLC gives to the member personally, the losses it gives the member and any debt the LLC takes over for the member. Here, Jackie and Pat’s stake in the company is the farm property. If the business goes south, they could lose the farm property. However, so long as they keep their personal affairs separate from their business affairs and do their best to reasonably capitalize the company, they will not be at risk of losing their personal assets.

Section 2.5: Return of Captial

No Member is entitled to withdraw from the Company, to receive a return of any part of the Member’s Capital Contribution or to receive a repayment of any balance in the Member’s capital account, except as expressly provided in this Agreement.¹⁶ No Member will be paid interest on any Capital Contribution or on the Member’s capital account.¹⁷

¹⁶ Overall, this provision states that members are not entitled to simply ask for their investment in the company to be returned. Without a provision like this, state laws might allow a member to withdraw from the LLC upon giving notice to the members. The problem is that a withdrawing member gets the return of their contribution to the LLC. The farm may not have the cash to pay back the capital contributed. So, this section states that a member doesn’t have a guaranteed right to withdraw. Instead, the LLC can allow a member to withdraw only if the parties unanimously agree. Here, the members have to agree on the terms of the withdrawal, including when and how a withdrawing person is to be paid out for their percentage interest.

¹⁷ A capital contribution is not a loan. The members are not entitled to any interest on the amount they contribute.

Article 3: Allocation of Profits and Losses; Distributions

Section 3.1: Allocation of Profits and Losses¹⁸
All profits and losses of the Company shall be allocated to the Members in accordance with their Percentage Interests¹⁹ as detailed on Exhibit B.

¹⁸ Allocating profits and losses is done to calculate taxes—it doesn’t necessarily mean you hand out money. Members may not actually see any cash from the profit because the business is probably putting profit back into the business—not paying it out. That doesn’t matter to the IRS, however. This is because an LLC does not pay taxes on its profit. Instead, the individual members report the LLC’s profits and losses on their individual tax returns. The members will each pay income tax on their share of the profits whether or not they actually receive the money. If members get cash or property from the LLC, then the LLC is making a distribution. That’s addressed in the next section.

¹⁹ Oftentimes, married couples contribute marital property that they own in equal halves, so all profits and losses are allocated equally. This is the case in our example, where Jackie and Pat own the farm property, tools and equipment equally. However, if one member makes additional contributions and the percentage changes, the profit and loss allocation changes as well.

^{19 cont.} Profits and losses can be allocated in a way that is separate from percentage interests. LLCs are popular because of this flexibility that is not permitted in a corporation. However, there are detailed tax regulations as to how losses can be assigned. By assigning profits and losses according to your percentage interest, you can be comfortable that you are complying with those regulations. If a member wants to make changes to loss allocations (which may be desirable if one member has a unique tax situation such as an inheritance or large salary), check with an accountant or attorney before taking action.

Section 3.2: Distributions

Members are not entitled to any distributions. Members may declare distributions by unanimous consent.²⁰ Distributions shall be allocated to Members in accordance with their Percentage Interests. No distribution may be declared that would result in the Company being unable to pay its debts as they become due in the usual course of business, or in the fair value of the Company’s total assets to be less than the sum of its total liabilities.²¹

²⁰ A distribution is where the LLC actually gives members money or property, above and beyond any salary or wage members already receive for their duties. Distributions are essentially shares of the total profit, above and beyond expenses (including salary) of the business. Again, this is different than allocating profits and losses for the purposes of paying taxes on that amount. This provision requires unanimous consent before profits in the company are distributed to the members. It’s good to state specifically that a member cannot demand that they receive the business’s profit in cash. The company might wish to always put profit back into the business rather than pay it out. However, you are free to make distributions as you wish. You could, for example, only require majority consent. Or you could provide that any profit above a certain threshold at the end of your year must be distributed to the members.

²¹ State LLC statutes usually prohibit distributions under certain circumstances, so this provision basically reinforces the law. For example, members can’t give themselves the business’s assets if doing so would jeopardize its ability to pay the bills. This would subvert the liability protection offered by an LLC.

Article 4:Management of the Company

Section 4.1: General Powers
The Company shall be managed by its Members.²² The Members shall each have the right, power and authority to control all of the business and affairs of the Company, to transact business on behalf of the Company, to sign for the Company or on behalf of the Company, or otherwise to bind the Company.

Section 4.2: Manner of Acting²³

Except as otherwise provided in this Agreement, the Members may act on majority consent at a meeting in which a quorum of the Members participate. Majority consent means the consent of holders of more than 50 percent of the Percentage Interests at the time of the consent, unless otherwise expressly provided in the Agreement. Members holding sufficient Percentage Interests to give majority consent to the action taken at any meeting shall constitute a quorum.²⁴ Alternatively, the Members may act by unanimous written consent without a meeting.

²² This provision establishes the LLC as a “member-managed LLC.” Basically, the day-to- day affairs are managed by the members themselves. Some LLCs choose to be managed by an appointed manager. This is called a “manager-managed LLC.” For an example of this structure, see the Extensive Operating Agreement for Sun Sisters Farm, LLC.

²³ This is a somewhat confusing phrase. Basically, this section defines how the entity itself makes decisions. This should not be confused with how the members conduct the farm’s day-to-day business affairs. Section 4.1 explains that the members each have the authority to perform the usual tasks required to run the farm, and no vote is needed. Under some circumstances the members might need to make “big” decisions together, and they do so by following this process. The default threshold for such big decisions in this agreement is majority consent. Incidentally, many of the provisions in this agreement specifically require unanimous consent. Any provision that requires unanimous consent will overrule the default of majority consent.

²⁴ This seems a bit silly with only two members. If each member has half the ownership, both members must attend to have a quorum and you both need to agree in order to get majority consent. This section is really only useful if another member is added. (In that case, you may want a more thorough operating agreement.)

Section 4.3: Actions Requiring Unanimous Member Approval²⁵

Not withstanding any other provision of this Agreement, the unanimous, written consent of the Members shall be required to approve the following matters:

1. Dissolution or winding up of the Company;
2. Merger or consolidation of the Company;
3. Sale, transfer, contribution, exchange, mortgage, pledge, encumbrance, lease or otherdisposition or transfer of all or substantially all of the assets of the Company;
4. Declaration of any distributions by the Company;
5. Amendments to this Agreement;
6. Issuance of any interest in the Company, including admission of new Members andadditional Capital Contributions from a Member except as permitted by Section 5.1²⁶; and
7. Conversion of the Company to a different entity.

²⁵ For a farm that has only two spouse members and each has 50 percent interest, if they have majority consent they also have unanimous consent. So, it could be silly to also list out things that require unanimous consent. But, if one person contributes additional capital, that person has more than 50 percent ownership and then holds majority consent. In that case, only these items that specifically require unanimous approval would need the consent of theminority member. By including these details, this operating agreement may be useful if an additional member, such as a child, is added in the future. If a member does something like sell the LLC without consent, that action is invalid and the member who didn’t participate in the decision may have some recourse.

²⁶ Members generally want to unanimously approve any additional members or capital contributions because they can change the percentage interest breakdown. However, here, Section 5.2 allows each spouse to transfer his or her interest in the LLC to their children, to each other, or to a trust without the consent of the other.

Article 5: Transfer of Assignment of Interests²⁷

Section 5.1: Definitions

1. “Transfer”meanstosell,assign,give,bequeath,pledge,orotherwiseencumber,divest,disposeof, or transfer ownership or control of all of, any part of, or any interest in a Percentage Interestto any person or entity, whether voluntarily or by operation of law, whether before or upon death.
2. “Permitted Transferee” means: (1) in the case of a Member that is an entity, the owners of the Member; (2) the spouse or the child of a Member or of any individual identified in subsection 1above; (3) another Member; (4) a trust created for the benefit of a Member and/or any persons identified in subsections 1–3, above; (5) an entity controlled by, controlling or under common control with a Member or any persons identified in subsections 2, 3 and 4, above; or (6) the Company.²⁸
3. “Involuntary Transfer” means any Transfer of a Percentage Interest by operation of law or in any proceeding, including a Transfer resulting from the dissociation of a Member, by or in which a Member would, but for the provisions of Section 5.3, be involuntarily deprived of any interest in or to the Member’s Percentage Interest, including, without limitation, (a) a Transfer on bankruptcy, (b) any foreclosure of a security interest in the Percentage Interest, (c) any seizure under levy of attachment or execution, or (d) any Transfer to a state or to a public office or agency pursuant to any statute pertaining to escheat, abandoned property or forfeiture.

²⁷ Here’s a plain-language summary of Article 5: A member can’t sell or give away his or her interest in the LLC to anyone other than their children without approval of the other member. If the person does, the transfer is invalid. If someone takes over a member’s interest in LLC (the most likely scenario being a creditor seizes it) then the new member receives distributions only—not voting rights. It is necessary that the more exacting, technical language of the section be accurate.

²⁸ This means members can transfer interests to each other, to children and to any trust members might create to manage property or assets, without first getting unanimous consent. This is most useful regarding wills: If members leave their interest to each other, their children or a trust, it may be easier to execute with this provision. Check with an attorney for more information on planning the estate.

Section 5.2: Transfers without Consent

A Member may Transfer all or part of the Member’s Percentage Interest in the Company only with unanimous consent of all Members. Any attempt by a Member to Transfer all or part of his or her Percentage Interest in the Company without the prior approval of the Members shall be void.²⁹ However, a Member may Transfer all or any portion of the Member’s Percentage Interest to a Permitted Transferee without unanimous consent.³⁰

²⁹ A void transfer means it’s as if it never happened. That means that even if Sonja sold her share of the company for cash to her best friend Erika without consent, the transfer is void. Sonja would still be a member and could still conduct business on behalf of the LLC. If Erika, not knowing that the transfer is void, votes or takes action on the LLC, those actions are void.

³⁰ The first part of this section makes it difficult to transfer membership—all members need to approve it. But, the second part adds an exception. Transfer is permissible without unanimous consent to certain people such as children, other members, the Company and other entities such as a trust.

Section 5.3: Involuntary Transfers

1. An Involuntary Transfer to any one other than a Permitted Transferee will be effective only after the Members have complied with applicable provisions of this Section 5.3.³¹ The creditor, receiver, trust or trustee, estate, beneficiary, or other person or entity to whom a Percentage Interest is Transferred by Involuntary Transfer (the “Involuntary Transferee”) will have only the rights provided in this Section 5.3.
2. Notice to Company. The Transferor and the Involuntary Transferee shall each immediately give written notice to the Company describing the event giving rise to the Involuntary Transfer; the date on which the event occurred; the reason or reasons for the Involuntary Transfer; the name, address and capacity of the Involuntary Transferee; and the Percentage Interest involved (a “Notice of Involuntary Transfer”).
3. Effect of Involuntary Transfer. Unless and until the Involuntary Transferee is admitted as a Member by majority consent³² (determined by excluding the Transferor’s Percentage Interest), the Percentage Interest held by the Involuntary Transferee shall have no voting rights. Unless and until the Involuntary Transferee is admitted as a member, the determination of majority consent for all purposes shall be made by excluding the Percentage Interest held by the Involuntary Transferee.

³¹ This means that if one member never receives notice that a creditor has seized a member’s interest (in subsection c) as required, then the member isn’t responsible to find out themselves.

³² Members can always admit an Involuntary Transferee as a member (i.e., give them voting rights, etc.), if wanted.

Section 5.4: Assignment

No Member may assign his or her interest in the Company.³³

³³ Assignment is different than transfer of an interest. Assignment means that the person gets the profits/losses/distributions but cannot vote. Transfer means that the person gets profits/losses/distributions plus voting rights. Some state LLC statutes allow a member to assign his or her interest at any time, in whole or in part. This provision, instead, prohibits assignment. Many LLCs prohibit assignment because they don’t want a member voting onLLC matters if the member does not have a financial interest in profits and distributions.

Article 6: Effect of Dissociation

The dissociation of a Member will not entitle a Member to a distribution in redemption of the Member’s Percentage Interest. An event of dissociation will be treated as an Involuntary Transfer pursuant to Section 5.3 of this Agreement.³⁴

³⁴ This section is basically restating Section 2.4: Members cannot withdraw and demand return of their capital contributions or capital account. It can be useful to repeat just to be sure it’s clear.

Article 7: Dissolution

The Company shall be dissolved, and shall terminate and wind up its affairs, upon the first to occur of the following:

1. The determination by the Members to dissolve the Company;³⁵ or
2. The entry of a decree of judicial dissolution.

³⁵ Although no single member can withdraw without consent of the other members, both can vote to dissolve the entire company.

Article 8: Winding Up and Distribution of Assets

Section 8.1: Winding Up
If the Company is dissolved, the Members shall wind up the affairs of the Company.³⁶
Section 8.2: Distribution of Assets
Upon the winding up of the Company, the liabilities of the Company, including all costs and expenses of the liquidation, shall be paid first. If there are insufficient assets, liabilities shall be paid according to their priority and, if of equal priority, ratably to the extent of assets available. Any remaining assets shall be distributed to the Members in proportion to their Percentage Interests.

³⁶ This means that if an LLC is dissolved, members won’t ignore the dissolution by carrying on business as usual.

Article 9: Indemnification

1. Tothemaximumextentpermittedbyapplicablelaw,theMembersshallnotbeliabletotheCompany or any other third party (i) for mistakes of judgment, (ii) for any act or omission bysuch Member, or (iii) for losses due to any such mistakes, action or inaction.³⁷
2. Exceptasmayberestrictedbyapplicablelaw,theMembersshallnotbeliablefor,andtheCompany shall indemnify the Members against, and the Company agrees to hold the Members harmless from, all liabilities and claims (including reasonable attorney’s fees and expenses in defending against such liabilities and claims) against the Members, or any of them, arising from the Members’ performance of duties in conformance with the terms of this Agreement.³⁸

³⁷ This means that if members make an honest mistake or do something innocently dumb and cause the Company harm, the Company or a third party can’t sue the member for it.

³⁸ An indemnification provision is simply a promise by another party to cover your losses if he or she does something that causes you harm or causes a third party to sue you. Indemnification provisions can vary quite a bit. Here, this indemnification provision means that if someone sues members for something they did on behalf of the LLC, the LLC has to pay to defend that lawsuit. An LLC should consider carrying insurance for this—without insurance, the business probably can’t afford to follow through on this provision. Farm liability insurance may or may not provide this coverage. A commercial policy might be necessary.

Article 10: Miscellaneous

Section 10.1: Separability of Provisions
Each provision of this Agreement shall be considered separable. If any provision of this Agreement is determined to be invalid or contrary to any existing or future law, the invalidity shall not affect those portions of this Agreement that are valid.

Section 10.2: Governing Law and Jurisdiction

This Agreement and the rights of the Members shall be governed by the State of Wisconsin.

Section 10.3: Dispute Resolution³⁹

If a dispute arises out of this Agreement, or a breach hereof, or otherwise develops between or among the Members, then the Members affected shall (before resorting to arbitration, litigation or any other dispute resolution procedure) each proceed to negotiate with each other in good faith, on a commercially reasonable basis. They must meet in person with one another at least three times in an effort to reach a resolution. If no resolution has been reached after such efforts, then they shall proceed to mediation administered by the American Arbitration Association under its Commercial Mediation Rules. If mediation is not successful in resolving the entire dispute, or is unavailable, anyoutstanding issues shall be submitted to final and binding arbitration in accordance with the laws of the State of Wisconsin. The arbitrator’s award will be final and the judgment may be entered upon it by any court having jurisdiction within the State of Wisconsin.

³⁹ It is highly recommended that you include a dispute resolution clause. Keep in mind that a dispute may come into play with third parties, such as creditors. Here, mediation is preferred as it is generally the least expensive and most efficient way for resolving disputes. While many consider them effective for achieving just outcomes, both litigation and arbitration can be timely and expensive regardless of a “winning” outcome, the former more so than the latter. So as a safeguard, consider the worst-case scenario, a super-messy dispute involving facts and he said, she said opinions, and then determine how you’d want the dispute to be resolved so that you can get on with your farming operations.

Exhibit A:

[The Articles of Organization]

Exhibit B:⁴⁰

 Member Contributions

Member	Item	Value	Percentage Interest
Pat Farmer	Farm property located at [address and official parcel number]	$50,000	50%
	Farmall Super A	$900	50%
	Water wheel transplanter	$4,100	50%
	...and so forth...		50%
Jackie Farmer	Farm property located at [address and official parcel number]	$50,000	50%
	Irrigation equipment	$3,500	50%
	1998 Ford F150	$1,500	50%
	...and so forth...		50%
		$110,000	100%

⁴⁰ It is important to update this exhibit if the members contribute additional capital. However, the exhibit does not need to be updated as the value of the contributions change. The value of the contributions into the future is necessary for accounting and tax filings, but it’s not relevant to whether and how an LLC is created.

Member Contributions

Amendment 1

Member	Item	Value	Percentage Interest
Pat Farmer	Farm property located at [address and official parcel number]	$50,000	50%
	Farmall Super A	$900
	Water wheel transplanter	$4,100
	...and so forth...
Sonja Farmer	Farm property located at [address and official parcel number]	$25,000	25%
	Irrigation equipment	$1,750
	1998 Ford F150	$750
	...and so forth...
Chris Farmer	Farm property located at [address and official parcel number]	$25,000	25%
	Irrigation equipment	$1,750
	1998 Ford F150	$750
	...and so forth...
		$110,000	100%

Sample Extensive LLC Operating Agreement with Annotations

Sun Sisters Farm, LLC | LLC OPERATING AGREEMENT¹

This Operating Agreement (the “Agreement”) of Sun Sisters Farm, LLC (the “Company”) is made by the signatory parties (the “Members”²) for the purpose of making the acknowledgment at the end of this Agreement and is entered into as of the date entered on the signature page. The Members have formed the Company by filing with the Wisconsin Department of Financial Institutions the Company’s Articles of Organization, a copy of which is attached to this Agreement as Appendix A and incorporated by this reference.³

¹ An operating agreement outlines how the LLC entity is to operate or run its business. As discussed in the chapter on LLCs, it is important to create an operating agreement primarily for three reasons: (1) it helps safeguard the personal liability protection LLCs provide for individual members, (2) it lets your farm operation take advantage of the flexibility aspects of the LLC (otherwise your state’s LLC statute will control how you must manage and operate your business), and (3) it allows you to set more favorable ground rules in your relations with third parties. The rules included in this sample operating agreement provide just one example of how an LLC could be managed and operated. The annotations point out various other ideas and ways for managing and operating an LLC. Again, the LLC structure is often preferred over a corporation because it provides far greater flexibility to adapt rules to best suit your unique business. So use your imagination and really think about what would be ideal given the interests and objectives of your particular farm operation. A lot of the “rules” in this model agreement may seem drastic and overly specific, but it’s better to have them in place than to just hope for the best. One way of thinking about an operating agreement is to imagine all worst-case scenarios and then figure out how you’d want each scenario to be handled. Nevertheless, keep in mind that your operating agreement must comply with certain baseline requirements set forth in each state’s LLC statute and regulations, which do vary from state to state. It is advisable to have an attorney draft or at least review your operating agreement before finalizing it. This operating agreement is for a Wisconsin business. If you use it as a starting point, be sure to make necessary changes to reflect your state.

² “Members” means the same thing as “owners.” Because LLC law uses members, we do too.

³ This creates the official link between the state-filed articles of organization and this operating agreement. It’s not necessary, but it is recommended.

The Members wish to enter into this Agreement for the purposes of providing the rights, obligations and restrictions contained in this Agreement and otherwise to govern the operations and management of the Company, and the Members agree as follows:⁴

⁴ The terms set forth in the operating agreement are not the only terms and conditions for operating the LLC. In running everyday matters, LLC members set all sorts of policies and procedures for how to manage the business or make routine decisions. These policies evolve with changing circumstances. The operating agreement is for more overarching rules: who owns the business, how are big decisions made, how and when are profits and losses allocated, how are disputes resolved, how can owners get out of the business, etc. While members can change these foundational rules by amending the operating agreement, they are typically more stable and long lasting. It’s recommended not to include too many day-to-day operational matters in an operatingagreement. Administrative issues can arise when frequently amending the operating agreement, which may involve getting every member to approve changes. If it’s important to you that some of these day-to-day matters are included, you could make a reference to an appendix and add them there. We do this a few times in this model operating agreement as an example, including a reference to the roles, responsibilities and benefits of “manager-members.” (See, for example, Article 4, Section 2.)

Article 1: Organization and Purpose

Section 1.1: Name of the Company

The name of the Company shall be “Sun Sisters Farm, LLC.”⁵ The Company may do business under that name and under any other name or names that the Members approve. If the Company does business under a name other than that set forth in its Certificate of Formation, then the Company shall file assumed business name certificates as required by law.⁶

⁵ Most state laws require that the name include the words “limited liability company” or the abbreviation “LLC.”

⁶ This basically provides that the Company could operate under another name through a “doing business as” (DBA), and wouldn’t have to enter into another operating agreement.

Section 1.2: Purpose

The Company is organized to operate a farm business and to do any and all things necessary, convenient, or incidental to that purpose and to conduct any other lawful business.⁷

Section 1.3: Term

Unless dissolved earlier under the terms of this Agreement, the term of the Company shall be perpetual.⁸

Section 1.4: Principal Office

The principal office of the Company in the State of Wisconsin shall be located at 11 Get Along Ln., Madison, WI 53593 or at any other place within the State of Wisconsin approved by a Majority Vote of the Members.

Section 1.5: Registered Agent

The name and address of the Company’s registered agent in the State of Wisconsin shall be Jema Member.⁹

⁷ This section is not legally necessary. It’s an opportunity for owners to incorporate the business purpose into the legal structure of the farm, if you want to. The purpose can be binding in that an action taken by a member in opposition to the business purpose could be invalid. But, the phrase “... and to conduct any other lawful business” takes any teeth out of the purpose. Many farmers like incorporating a purpose into the operating agreement because it feels good to do so and serves as a reminder of why they are in business.

⁸ It’s standard to make LLC’s perpetual instead of setting a specific number of years, as it allows for the option to keep the business running as long as you want without having to jump through additional hurdles.

⁹ The registered agent is the person that will be notified on behalf of the LLC if any lawsuit is filed against the company. All states require you to identify an official address and a registered agent, both of which must be included in the articles of organization. It’s not necessary to include them again here, but it can help to have a direct reference for those just reading the operating agreement.

Section 1.6: Designation of Members Section 1.6.1:

On Appendix B shall be set forth the name of each Member and the appropriate contact information for such Member (including, without limitation, such Member’s mailing address, telephone num- ber and email address as well as, in the case of a Member that is an entity, the name and title of an individual to whom notices and other correspondence should be directed).¹⁰ Each Member shall promptly provide the Company with the information required to be set forth for such Member on Appendix B and shall thereafter promptly notify the Company of any change to such information.

¹⁰ Appendix B is the way to track your members’ contact information and percentage interests (or percent of ownership) in the company. It’s important to keep Appendix B up to date if and when anything changes, including the addition of new members or additional capital investments, which we’ll discuss soon.

Section 1.6.2:

Additional Members may be admitted, from time to time, with the unanimous consent of all Members.¹¹ Upon (i) the prospective Additional Member’s execution of this Agreement, as amended to reflect the terms of its membership, and (ii) the prospective Additional Member’s paying in full the Initial Capital Contribution¹² (the amount of which shall be determined by the unanimous consent of all Members), such prospective Additional Member shall be admitted as a Member.

11 Sometimes owners decide up front that they most likely will not want any additional members. This is often because they don’t want their own percentage interest to be reduced or diluted, which could reduce their share in profits/losses as well as their voting power. However, it’s still recommended that a provision is included for a process to add new members, as one never knows. What if the business needs more funds, and someone you like and trust wants to invest as a part owner. This Article requires that all members must agree to admit any additional members, which is an added safeguard. Another option would be to only require consent of a supermajority (typically defined as 75 percent) or even just the consent of a majority. Requiring less than unanimous consent may be advisable when the LLC has numerous and diverse members or you otherwise anticipate that it will be challenging to get everyone to agree.

¹² Again, we discuss capital contributions more below. This just means that any additional members must make an investment of some asset, whether it be cash or in-kind (e.g., services, equipment), in the company before becoming a member.

Section 1.6.3:

A person shall not be admitted as a Member prior to the execution of this Agreement, as updated to reflect that person’s Percentage Interest and the making of the full Initial Capital Contribution.¹³

Section 1.6.4:

The Capital Contributions of each Additional Member shall be set forth on Appendix B. The Percentage Interest of each Additional Member shall dilute the Percentage Interests of the previously admitted Members in proportion to their respective Percentage Interests.¹⁴

¹³ This just means that any new member must sign and abide by this operating agreement.

¹⁴ Appendix B must be updated with information related to any additional member, because Article 3.1 states that profits and losses are distributed according to Appendix B. With the addition of new members and their investment of capital, the percentage interest of existing members will be diluted or reduced, because at any given time, if you add up the percentage interests of all members it must equal 100 percent. This article explains that the dilution will be based on the most recent proportion of interest between the existing members, which may be different than the initial proportion (i.e., if one of the initial members had made an additional capital contribution the proportion of ownership will have changed).

Article 2: Capital Contributions

Section 2.1: Initial Capital Contributions¹⁵

Upon the execution of this Agreement, the Members shall contribute the amount set forth on Appendix B as such Member’s initial Capital Contribution, which shall entitle them to the Percentage Interests¹⁶ set forth on Appendix B. The “Percentage Interests” is determined by dividing the Member’s contribution by all contributions to the Company. The Company shall record the amount of the initial Capital Contribution of each Member as a contribution to the capital of the Company. The Members agree to the amount and value of the Capital Contributions. “Capital Contributions” as hereafter used is defined to include any subsequent Capital Contributions added to the initial Capital Contributions.

¹⁵ “Capital Contributions” are the assets each member contributes to the LLC. Assets contributed can be cash, equipment, services and other things of value.

^{15 cont.} The article on capital contributions is important for several reasons. First, although an LLC provides protection for personal assets, assets contributed to the LLC are no longer personal. In effect, members are liable for the LLC’s debts to the extent that each has contributed to the LLC. That’s why it’s important to get the exact contribution in writing now and into the future. Second, an LLC needs to be adequately capitalized to be legally legitimate. How much capital do you need? Common sense suggests that you need enough to pay bills as they come due. If you can do that with cash flow from revenue, you may not need much capital.

^{15 cont.} Of note, we need to make a distinction between a capital contribution and a loan, lease or sale. You can loan your LLC cash or sell or lease your LLC land or equipment. None of these situations is considered a capital contribution. For example, a member could loan the LLC a total of $1,000 for the opening bank account balance. This could cover the business until cash flow is sufficient to pay the member back. Unlike a capital contribution, the member has a right to be paid back for the loan. Of course, if the business folds, the business may need to pay off other creditors first and the member could end up losing that money in the end. Also, a member can sell or lease the LLC physical assets such as land or equipment rather than give the physical assets as a capital contribution. Loans, sales and leases should all be separately documented. So now you must ask yourself: Exactly what capitalization and contribution arrangement is best for your farm operation? It will depend on several factors: costs of starting up the farm, expected cash flow, expected expenses, expected revenue and more. Contributions, expenses and revenue all determine income at the end of the year, which determines the members’ tax obligations. This subject can be quite detailed. Bringing the farm business plan to an accountant is the quickest way to get answers to these questions. Also, bear in mind that farmers can make additional capital contributions, which may change the percentage interest breakdown, so the initial decision isn’t necessarily set in stone.

¹⁶ The “percentage interest” is the LLC way of saying “percentage of ownership.” Basically, as this provision is written, if you contribute half the capital to the entity, you get half ownership. It is possible for LLC members to allocate ownership in percentages that are not equal to capital contributions. But, that subjects everyone to more complicated tax rules. Don’t do that without consulting an attorney and accountant.

Section 2.2: Capital Accounts¹⁷

A separate Capital Account shall be maintained for each Member, which shall be credited with:
(1) the Member’s Capital Contributions, (2) the Member’s allocable share of profits, and (3) the amount of any debt of the Company that is assumed by the Member or that is secured by any property distributed to the Member. The capital account shall be debited with: (1) the amount of cash and the asset value of the property distributed¹⁸ to the Member, (2) the Member’s allocable share of losses, and (3) the amount of any debt of the Member that is assumed by the Company or secured by any property contributed by the Member to the Company.¹⁹

¹⁷ The capital account is a line item account. It exists on a spreadsheet or in a QuickBooks file, for example. It’s not a bank account. The capital account is maintained for tax purposes. Requirements for capital accounts are outlined in federal tax law. This article outlines the basic procedures. It’s helpful to include it to be sure that everyone understands that a capital account must be maintained. Very detailed capital account regulations are in Treasury Regulations 1.704-1(b)(2) (ii)(b)(1), (b)(2)(iv). If you file your own taxes, you will need to know these basics. If you work with an accountant or tax preparer, they will already know and follow these procedures.

¹⁸ “Distributed” is a legal term that means you’ve transferred legal ownership of an item from the LLC to a member. It is the opposite of a capital contribution.

¹⁹ To summarize, a member’s “stake” in the LLC is the total of what the person puts in, the member’s share of the profits and the value of any debt the member personally takes over from the LLC. A member’s stake is reduced by any property the LLC gives to the member personally, the losses it gives the member and any debt the LLC takes over for the member.

Section 2.3: No Additional Capital Contributions.

No Member shall be required to contribute any additional capital or loans to the Company.²⁰ Any future Capital Contributions by Members shall be approved in amount and in valuation method by the Members and recorded on Appendix B.²¹

Section 2.4: No Interest on Capital Contributions

No Member shall be paid interest on their Capital Contributions.²²

²⁰ This article specifically states that members are not required to contribute additional resources. Again, a capital contribution is the member’s exposure to liability. Generally, a member wants to limit the total contributions to the LLC. As long as the LLC has positive cash flow and can reasonably be expected to pay all of its bills, including the loan payment, members shouldn’t have to invest more money. Instead, they might consider making loans to the LLC for ongoing needs. Some LLCs want to require future or ongoing contributions (for example, if planning a significant expansion and bank loans can’t be gotten or aren’t wanted). If ongoing or future capital contributions are required, the operating agreement should have more complex rules such as what happens on default, etc.

²¹ Again, Appendix B needs to be actively maintained if any member, new or existing, invests more capital. Also note that modifying Appendix B is an amendment to the operating agreement. Thus, you will have to follow the amendment process and record the change on Appendix B by basically updating the percentage interest for it to take effect. This agreement requires unanimous consent for any amendment. This means that Marie, Jema and Ingrid all have to agree on amendments to Appendix B. When Margo comes on, she too has to agree before any amendment can be made. It is advisable to consult with an attorney or your accountant before making changes to Appendix B as there may be tax implications. You should update Appendix B as soon as the capital is invested in the business. Again, as mentioned in the footnotes above, a person can loan personal money to an LLC, which is not considered a capital investment and would not have to be tracked on Appendix B. A loan represents a debt of the business to an individual; no ownership is established.

²² A capital investment isn’t a loan, so members don’t get interest on capital investments.

Section 2.5: Return of Capital Contributions

Except as otherwise provided in this Agreement, no Member shall have the right to receive any return of any Capital Contribution or to receive a repayment of any balance in the Member’s capital account.²³

Section 2.6: Penalties for Failure to Make Required Contributions

If a Member fails to make a Capital Contribution when due, the Manager shall promptly notify such Member in writing that he/she/it is a “Defaulting Member.” If within fourteen (14) days after actual receipt of such notice the Defaulting Member has not made the required Capital Contribution, such Defaulting Member shall be subject to any and all penalties and remedies available at law or equity, as selected by the Members. In addition, the Members may determine by a Majority Vote that a Defaulting Member shall withdraw as a Member.²⁴

²³ Overall, this article states that members are not entitled to simply ask for their investment back. Without a provision like this, many state laws would allow a member to withdraw from the LLC upon giving notice to the members and require that the withdrawing member gets their capital contribution back. This becomes a problem if the farm operation does not have the cash flow to pay back the value of the capital contributed or would prefer to keep itinvested in the company. This article addresses this issue by saying that a member doesn’t have a guaranteed right to withdraw. Instead, the members have to agree on the terms of the withdrawal, including when and how a withdrawing person is to be paid out for their percentage interest.

²⁴ This article ensures that all members make their initial investment on time so that the company will be adequately capitalized. If a member doesn’t follow through, he or she will be considered a defaulting member and the other members could file a lawsuit to get the promised initial investment or require that the defaulting member leave the company.

Section 2.7: Limitation of Liability

Except as otherwise required by applicable law or as provided in this Agreement, Members shall have no personal liability for the debts and obligations of the Company.²⁵

^{24 cont.} Bottom line, there are many creative ways to capitalize the company, but it’s important to set some penalities in the operating agreement for failing to make a capital contribution to make sure everyone does what they say they’re going to do.

²⁵ Members are personally liable only up to the amount of their capital investment, in the sense that you may not get that money back if, for example, the company is sued.

Section 2.8: Contributed Property

With respect to any property contributed by a Member to the Company, such Member shall provide to the Company any information reasonably requested by the Company for purposes of determining the Company’s tax basis in such property.²⁶

²⁶ If a member gives property as the capital contribution, that member will need to provide a valuation of the property (i.e., through an appraisal or other legitimate process), which is considered the basis. Basis is used to figure depreciation, amortization, depletion, casualty losses and any gain or loss on the sale, exchange or other disposition of the property, all of which will be necessary for allocating profits and losses.

Article 3: Allocations and Distributions

Section 3.1: Allocation of Profit or Loss²⁷

For financial accounting and tax purposes, the Company’s net Profit or Loss shall be determined on an annual basis and shall be allocated to the Members in proportion to each Member’s Percentage Interests²⁸ as set forth on Appendix B as amended from time to time in accordance with U.S. Department of the Treasury Regulations (hereafter “Regulations”) Section 1.704-1.²⁹

²⁷ Allocating profits and losses is done to calculate taxes—it doesn’t necessarily mean you hand out money. Members may not actually see any cash from the profit because the business is probably putting profit back into the business—not paying it out. It doesn’t matter to the IRS. Members are required to pay taxes on the profit whether or not they actually receive it. This is because an LLC does not pay taxes on its profit itself—members must account for the business’s profits on their personal tax returns. If the LLC pays members cash or property, then the LLC is making a distribution, which is addressed in the next section.

²⁸ LLCs are popular because members can choose how to allocate profits and losses, which is not permitted in a corporation. However, there are detailed tax regulations as to how losses can be assigned. By assigning profits and losses according to your percentage interest, you can be comfortable that you are complying with those regulations. If members want to make changes to your loss allocations (which may be desirable if one member has a unique tax situation such as an inheritance or large salary), check with an accountant or attorney before taking action.

²⁹ It’s advisable to check with a tax attorney or accountant when making any amendments to Appendix B, just to make sure the effect will be as intended. This reference to the regulations is a safeguard to make sure you stay in compliance.

Section 3.2: Distributions³⁰

The Members may, but shall not be required to, distribute to the Members in proportion to their Percentage Interests any portion of available funds for each taxable year of the Company as the Members shall determine by Majority Vote.³¹ The phrase “available funds” shall mean the net cash of the Company available after appropriate provision to pay current operating expenses and to pay or establish reasonable reserves for future expenses, debt payments, capital improvements and replacements as determined by the Managers. No distribution may be declared that would result in the Company being unable to pay its debts as they become due in the usual course of business or in the fair value of the Company’s total assets to be less than the sum of its total liabilities.³²

³⁰ A distribution is where the LLC actually gives members money or property based on profits, which is above and beyond any salary or wage members already receive for their duties. If you want to give out the equivalent of a “salary” to a member, you do that in a different way, and you have to make sure the company’s revenue can sustain it if you write that into the operating agreement. Many folks who are more uncertain of their revenue/ expenses or who are growing the business will simply use the procedures of this article: Vote on a distribution when you think your revenue is exceeding your expenses and the business can afford it. Please note that a distribution is different than allocating profits and losses for the purposes of paying taxes on that amount. A distribution means you put money in your pocket. When you allocate yourself profits/losses, you do so for tax purposes—you may or may not actually see the money counted as profit on your tax return, as you might choose to reinvest the profit in the business (rather than make a distribution).

³¹ It’s good to state specifically that a member cannot demand that they receive the business’s profit in actual money. The company might wish to always put profit back into the business rather than pay it out. However, you are free to make distributions as you wish. This article provides that a distribution may be made upon majority vote. However,you could require unanimous consent of all members if you are concerned about cash flow.

³² State laws usually prohibit distributions under some circumstances. Members can’t give themselves the business’s assets if doing so would jeopardize its ability to pay its bills. Doing so would subvert the liability protection offered by an LLC.

Section 3.2.1: Distributions in Liquidation

Distributions in liquidation of the Company or in liquidation of a Member’s interest shall be made in accordance with the positive capital account balances pursuant to Section 1.704.1(b)(2)(ii)(b)(2) of the Regulations.³³

Section 3.2.2: Negative Account Balances

To the extent a Member has a negative capital account balance, there shall be a qualified income offset, as set forth in Section 1.70.1(b)(2)(ii)(d) of the Regulations.³⁴

³³ An operating agreement can establish certain tax designations, but they will be honored only if they have a substantial economic effect. This is quite a cumbersome area of tax law. The legal lingo in this article is included to ensure that you will meet this “substantial economic effect test” if and when the company’s interests or a member’s assets are liquidated or sold off upon dissolution of the company or termination of a member (i.e., the valuation and allocation of these interests passes muster). It’s not necessary to include this legalese (which is complex-sounding legal language), but advisable.

³⁴ Again, you should include this legal lingo, as following it will permit the substantial economic effect test to be met.

Article 4: Administrative Provisions³⁵

Section 4.1: Management of the Company Generally

Except as otherwise specifically provided in this Agreement:

Section 4.1.1: Manager Managed³⁶

The business of the Company shall be managed by Manager(s). Ingrid Sister and Margo Friend, shall be the initial Managers. Except as otherwise set forth in this Agreement or applicable law, all decisions concerning the day-to-day management of the Company shall be made by the Managers, whereby each Manager will have one vote; if the Managers fail to reach a majority agreement on a management issue, the matter shall be determined by a Majority Vote of Members.³⁷

³⁵ This article could also be titled “Management of the Company” and is an area of LLC law that provides a great deal of flexibility for determining how the day-to-day affairs of the company are managed and how more substantive decisions affecting the company are made. The provisions set forth in this model agreement provide just one example of how the day-to-day affairs and big decisions of an LLC could be managed. Most farm operations are unique, which is largely driven by the nature and diversity of farming as well as the diversity, interests and overall objectives of their founding members. You are encouraged to think creatively and devise a management protocol that best addresses the uniqueness of your business and your members’ interests. However, it is advised that you consult with an attorney to ensure that the management provisions in particular, and your operating agreement as a whole, comply with your state’s LLC statute and regulations.

³⁶ Most states have a default rule that the LLC is managed by its members unless otherwise provided for in the operating agreement. The provisions included in this model agreement designate this LLC as a “manager-managed” LLC. Basically one or more people are designated as managers and are responsible for managing the day-to-day activities of the company. Of note, the managers don’t necessarily have to be members. If you want to require that the managers be members, you should clearly specify this in your operating agreement. Managers typically have the authority to act on behalf of the LLC and to contractually bind the LLC. A manager-managed structure is recommended for farm operations with many and/or diverse members, some of whom either are not in close proximity to the day-to-day affairs or have no interest in running the company per se but who want to have a say in issues that have a substantial effect on their interests in the company (e.g., adding additional members or allowing additional contributions that will dilute their percentage interest, dissolving the entity, declaring distributions, etc.). Another option would be to have a member-managed LLC in which the members manage the day-to- day operations. An alternative section for a member-managed LLC may include:

• Member Managed. The Company shall be managed by its Members. The Members shall each have the right, power and authority to control all of the business and affairs of the Company, to transact business on behalf of the Company, to sign for the Company or on behalf of the Company, or otherwise bind the Company.

³⁷ It is important to clearly set forth how the day-to-day decisions will be made for manager- managed LLCs; particularly if there is more than one manager. Here, the day-to-day decisions are decided by one vote per person and not their percentage interest in the company, because the managers may or may not be members. But voting by percentage interest would be an option if the operating agreement requires that the managers are also members, in which case the manager-member(s) with the most percentage interest would ultimately control the day-to-day operating decisions.

Section 4.1.2: Member Action; Voting Rights³⁸

When actions are to be taken by the Members, each Member shall vote in proportion to the Member’s Percentage Interest as of the Record Date. Unless otherwise determined by the Majority of the Members, the Record Date shall be defined as 10 calendar days before the date of the meeting at which the vote is taken.³⁹ Manager Members shall not partake in any vote affecting his/ her/their roles, responsibilities, benefits or dismissal.⁴⁰

³⁸ This model agreement gives all members voting rights based on their percentage interest in the company. As outlined on Appendix B, at the beginning, Marie’s vote counts for 45 percent, Jema’s for 30 percent and Ingrid’s for 25 percent. Once Margo joins as a voting member, this changes so that Marie’s vote counts for 40.9 percent, Jema’s for 27.3 percent, Ingrid’s for 22.7 percent and Margo’s for 9.1 percent. Another option would be to make it one person, one vote so that each member’s vote carries equal weight despite their percentage interest. Yet another option would be to tier the membership interests (whether for a manager-managed or member-managed structure), which could include voting members and non-voting members. This could be of interest for farm operations with founding members driven by a distinct vision and mission but who have brought on additional investor members who trust the founding members to decide how the company should operate and just want a share in profits/losses. Or, you could designate certain committees where certain members have voting rights on certain issues. The possibilities are endless for LLCs. Just be sure to have an attorney review your agreement before finalizing to be sure it complies with your state’s baseline LLC laws and regulations.

³⁹ The record date is basically the cut-off date for determining the percentage interest allocation that will control the voting rights for a scheduled meeting. This is important, because the percentage interest could change between the time the meeting is called and the time the meeting takes place. Here, the record date is set at 10 days before the meeting unless the majority of the members agree otherwise. You could set the record date to be shorter or longer, or even on the date of the meeting itself.

⁴⁰ This makes it clear that if managers are members, they cannot vote on anything that affects their roles and responsibilities as managers. This would present a “conflict” between their personal interests and the best interests of the company. For example, Ingrid can’t vote on anything related to her salary, as she has a personal interest in the matter. This also serves to protect the managers themselves, as such conflicts of interest could subject them to liability if a dispute were to arise.

Section 4.1.3: Appointment of Managers

The Manager(s) shall serve until his/her/their resignation, a Majority of the Members vote to remove or replace the Manager(s), retirement, death or permanent incapacity. If such event results in the Company having no Manager, a Majority of the Members shall select one or more new Manager(s).

Section 4.2: The Manager(s) Will Carry on the Day-to-Day Affairs of the Company

The Manager(s) shall have the full authority to bind the Company with respect to matters in the ordinary course of business.⁴¹ Except as otherwise specifically determined by unanimous resolution of the Members or required by law, checks, drafts, promissory notes, orders for the payment of money and other evidence of indebtedness of the Company must be signed by two authorized Members if over $1,000 and must be approved by a Majority Vote of the Members if over $4,500.⁴² Except as authorized by this Section 4.2 or by a Majority Vote of the Members, the Manager(s) shall not have the power or authority to bind the Company in any way, pledge its credit or render it liable for any purpose.⁴³ The Manager(s) shall be entitled to compensation commensurate with the value of such services rendered as determined by a Majority of the Members. The roles, responsibilities and benefits of the Manager(s) are further set forth on Appendix C, which may be amended from time to time by the consent of a Majority of the Members.⁴⁴

⁴¹ This section provides that the managers have the authority to perform the usual tasks required to run the farm, and a member vote is not needed.

⁴² This is an example of how you could restrict the powers of the managers. It is common to require two authorized signatures on checks over a certain dollar amount, here $1,000. This ensures that at least one other person has visibility into the farm’s spending, which helps prevent runaway spending. Also, here, the managers can only bind the company up to $4,500. These limitations could be set as more or less, or taken out altogether.

⁴³ This is another safeguard. Basically, here managers can bind the company on any matter that is in the ordinary course of business and equates to less than $4,500 of indebtedness.

⁴⁴ The specifics of roles, responsibilities and benefits of managers may be set forth in the operating agreement itself. However, it’s often easier to incorporate them as a separate appendix that can provide more details and be more efficient for tracking changes. The specifics would include a clear description of roles and responsibilities, somewhat like a job description, as well as any special benefits such as salary, housing arrangements and health benefits, which are common for farm LLC managers. Here, this appendix may be amended by a majority vote of the members and thus does not require unanimous consent like other amendments to the operating agreement. This makes it easier to resolve such nuanced issues. However, you could require unanimous consent. Another option is to create an entirely separate employment agreement with your manager(s).

Section 4.3: Reimbursement

The Company shall reimburse the Manager(s) and/or Members for all direct out-of-pocket expenses incurred in managing and supervising the Company.

Section 4.4: Member Action; Voting Process⁴⁵ 

Section 4.4.1: Voting at Meetings

All Members shall be entitled to vote on any matter submitted to a vote. Members may vote either in person or by proxy at any meeting.⁴⁶ No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy.⁴⁷ Unless otherwise specifically provided herein, the Majority Vote of the Members shall be determinative. Majority Vote means the consent of holders of more than 50 percent of the Percentage Interests at the time of the vote.⁴⁸ A quorum shall be met when Members and proxies holding a majority of Percentage Interests are present.⁴⁹

⁴⁵ Under some circumstances, the members might need to make a decision together, and they do so by following these processes.

⁴⁶ A proxy is a separate agreement in writing that one member has with another member that specifies that the other member can vote on his or her behalf. Proxies count toward a quorum (the minimum percentage interest that must be present at a meeting to make actions valid), so allowing for proxies can make it easier for the company to ensure that things get done, especially if there are a lot of members. By allowing votes by proxy, members are free to decide for themselves whether they want to delegate their voting privileges to another member and not necessarily have to attend meetings. If it is important to you that all of your members make critical decisions for themselves, and that they attend meetings, then you shouldn’t allow proxy voting.

⁴⁷ State law generally establishes an 11-month default time limit on proxies, which protects the member initiating the proxy from potential abuse, and this simply reiterates the law.

⁴⁸ This article explains that the default threshold for making a decision is a majority vote of the members, which is based on the percentage interest allocation. You have many options here. First, you could set the threshold differently, such as a supermajority (or three- quarters consent) or unanimous consent. Also, you could base the voting rights on something different, such as one member, one vote. You could also specify that some members have voting rights and others don’t. It’s also important to note that this is the default voting threshold. Other places in the operating agreement specify a more stringent threshold, including a list of “big” decisions requiring unanimous consent set forth in Article 4.5.

⁴⁹ A quorum is a requirement that a certain number of people attend a meeting to even vote on a decision. Here, if less than a majority of members are present or accounted for through a proxy, then no vote can be held.

Section 4.4.2: Written Consent

Any action that may be taken at a meeting of the Members may be taken without a meeting if the Members consent in writing. Such consent shall set forth the action to be taken, and be signed and dated by Members holding the requisite Percentage Interests.⁵⁰

Section 4.5: Actions Requiring Unanimous Member Approval⁵¹

Notwithstanding any other provision of this Agreement, the unanimous, written consent of the Members shall be required to approve the following matters:

1. Dissolution or winding up of the Company;
2. Merger or consolidation of the Company;
3. Sale, transfer, contribution, exchange, mortgage, pledge, encumbrance, lease or otherdisposition or transfer of all or substantially all of the assets of the Company;
4. Amendments to this Agreement;
5. Issuance of any interest in the Company, including admission of new Members andadditional Capital Contributions from a Member; and
6. Conversion of the Company to a different entity.

⁵⁰ This provides another option for making decisions, which doesn’t require holding a meeting.

⁵¹ The actions set forth here have a substantial impact on the business and therefore LLC Agreements most often list them as requiring unanimous consent, which overrules the majority agreement default set forth in Article 4.4.1. If a member or set of members does something like sell the LLC without consent, that action is invalid and the member(s) who didn’t make the decision has some protection. Of note, operating agreements sometimes require only that a supermajority, usually defined as members owning at least three-quarters of the company, approve these types of decisions, including an amendment to the operating agreement. This may be advisable if the LLC has numerous and diverse members and it’s anticipated that it would be very challenging to get everyone to agree. For example, if 10members of an LLC have equal ownership and nine of the 10 want to wind down the farm or sell it, they would not be able to proceed if unanimous consent were required. However, they would be able to choose their favored course of action if the threshold were set at 75 percent. Keep in mind, however, that requiring unanimous consent protects initial founding members and safeguards their vision for how the company operates. Indeed, if and when additional members are added, the percentage interest of the initial members will get diluted, and the additional members could eventually hold a supermajority! Again, it’s up to you to decide and clearly outline in your operating agreement what is required for making various types of decisions—whether a majority, supermajority, unanimous consent or something else—so that it is most suited to the unique nature and makeup of your farm operation.

Section 4.6: Place of Meetings⁵²

Meetings of the Members shall be held at such place within or without the State of Wisconsin as determined by a Majority Vote of the Members.

Section 4.7: Annual Meeting

The annual meeting of the Members of the Company shall be held during the month of April of each year on the date and at the time each year as determined by a Majority Vote of the Members. The failure to hold an annual meeting at the time stated herein does not affect the validity of any action taken by the Company.⁵³

Section 4.8: Special Meetings

Meetings of the Members may be called for any proper purpose or purposes⁵⁴ by a Member or Members who hold at least 20 percent of the Percentage Interests.

⁵² This clause sounds obvious—it simply says the meeting could be held in Wisconsin or it could be held anywhere else. This clause is followed by several more that detail when, how, why and where a meeting might be held. Why state these obvious details? This is because we write an operating agreement anticipating that difficulties might arise. If relationships between members sour, some members might try to hold covert meetings where they make decisions that affect the farm’s sustainability or the rights of the members who aren’t present. These meeting notice and time/place provisions help prevent that possibility by preventing covert meetings from occuring.

⁵³ Most state laws don’t require members to have annual meetings. If you do decide to hold one, it’s important to designate a time and place. It’s also advisable to have an out clause so that if your annual meeting isn’t in fact held in the specified month, your actions at the annual meeting aren’t held invalid.

⁵⁴ Proper purpose is really anything that’s legal and reasonably worth the time and effort to hold a meeting. This is in here as a safeguard to raise issue if some member is unreasonably asking to have a meeting for anything and everything, or some “illegal” purpose.

Section 4.9: Conference Telephone Meetings

Meetings of the Members may be held by means of conference telephone or similar communications equipment so long as all Persons participating in the meeting can hear each other. Participation in a meeting by means of conference telephone shall constitute presence in person at such meeting.⁵⁵

Section 4.10: Notice of Meetings

A notice of all meetings, stating the place, day and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the meeting to each Member entitled to attend.⁵⁶

Section 4.11: Waiver of Notice

Attendance of a Member at a meeting shall constitute a waiver of notice of the meeting, except where such Member attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. A Member may also waive notification of a meeting in writing.⁵⁷

⁵⁵ Allowing for teleconference meetings gives members leeway in logistically making decisions and is advisable if members are particularly busy or geographically dispersed, making physical attendance at meetings challenging.

⁵⁶ This article is important to ensure that your members actually know when your meetings are being held. See also Article 4.10, which specifies how notice must take place.

⁵⁷ This basically means that if a member didn’t receive formal notice (the announcement that the meeting will be held) as specified in Article 4.10, and yet they attend the meeting, then they can’t complain that they didn’t receive notice. However, the member can raise objections at the meeting about how notice was given. This article protects members who may feel that somehow their interests are being subverted by the majority. It’s not necessary, but is advisable if you expect to have a lot of members or a diversity of interests, or otherwise think it’s likely that contentious issues may arise.

Article 5: Limitation of Liability; Independent Activities; Indemnification

Section 5.1: Limitation of Liability

To the maximum extent permitted by applicable law, the Members and Managers shall not be liable to the Company or any other third party (i) for mistakes of judgment, (ii) for any act or omission by such Member or Manager, or (iii) for losses due to any such mistakes, action or inaction.⁵⁸

Section 5.2: Independent Activities

Any Member or Manager may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, without limitation, the ownership, financing, management, employment by, lending or otherwise participating in businesses that are similar to the business of the Company. This agreement does not create any rights for the Company or the other Member related to independent ventures, including any income or profits from such independent ventures.⁵⁹

⁵⁸ This means that if members or managers make an honest mistake or do something innocently dumb and cause the company harm, the company or a third party can’t sue the member or manager personally for it. Of course, the members and managers have responsibility to be conscientious and make good business decisions. The courts will decide whether a mistake is innocent or the result of really bad judgment on behalf of the member or manager.

⁵⁹ This article protects members and managers who may be involved in related ventures or businesses. It basically allows them to compete with the business. Most states frown on “non-compete provisions” in any operating agreements or employment agreements, so if you do decide to place any limitations on members or managers with respect to activities outside of the farm operations, they must be reasonable in both subject and geographic scope. It is advisable to consult an attorney before writing non-compete limitations into your operating agreement.

Section 5.3: Indemnification

• Section 5.3.1: Indemnification

To the fullest extent permitted by applicable law, a Member, a Manager and each director, officer, partner, employee or agent thereof (“Covered Person”) shall be entitled to indemnification from the Company for any loss, damage or claim (including attorney fees and costs) incurred by such Covered Person by reason or any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of authority conferred on such Covered Person by this Agreement. Notwithstanding the prior sentence, no Covered Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Covered Person by reason of gross negligence, bad faith or willful misconduct with respect to such act or omissions. Any indemnity under this Section 5.3.1 shall be provided out of and to the extent of Company assets only, and no other Covered Person shall have any personal liability on account thereof.⁶⁰

• Section 5.3.2: Notice

In the event that any claim, demand, action, suit or proceeding shall be instituted or asserted or any loss, damage or claim shall arise in respect of which indemnity may be sought by a Covered Person pursuant to Section 5.3.1, such Covered Person shall promptly notify the Company thereof in writing. Failure to provide notice shall not affect the Company’s obligations hereunder except to the extent the Company is actually prejudiced thereby.⁶¹

⁶⁰ An indemnification provision is simply a promise by the other party to cover your losses if he or she does something that causes you harm or causes a third party to sue you. Indemnification provisions can vary quite a bit. Here, this indemnification clause means that if someone sues members for something they did on behalf of the LLC, the LLC has to pay to defend that lawsuit. An LLC should consider carrying insurance for this—without insurance, the business probably can’t afford to follow through on this provision. Farm liability insurance may or may not provide this coverage. A commercial policy might be necessary.

⁶¹ This requires that any member sued for their work with the LLC tells the company that the suit was filed. That way the company can monitor the issue and have adequate opportunity to represent its interests. However, the company can’t get out of its obligations to the person filing the suit simply because the member or manager failed to tell the company. Basically, this provision gives the company a right to go after members or managers who fail to give proper notice and yet protects any third party that has a valid claim against the company.

• Section 5.3.3: Contest

The Company shall have the right, exercisable subject to the approval of the disinterested Covered Persons, to participate in and control the defense of any such claim, demand, action, suit or proceeding, and in connection therewith, to retain counsel reasonably satisfactory to each Covered Person, at the Company’s expense, to represent each Covered Person and any others the Company may designate in such claim, demand, action, suit or proceeding.⁶² The Company shall keep the Covered Person advised of the status of such claim, demand, action, suit or proceeding and the defense thereof and shall consider in good faith recommendations made by the Covered Person.⁶³

⁶² This ensures that the company has a say and can monitor the effectiveness of the outcome of any dispute that may arise involving its managers and/or members and requires the company to pay for legal counsel.

⁶³ Indemnification is easiest to understand through examples. Recall that Ingrid handles the production and community-supported agriculture program of Sun Sisters Farm, LLC. A couple of years into the CSA, Ingrid runs into a very disgruntled customer named Mildred. Mildred wasn’t familiar with the CSA concept before she signed up for a Sun Sisters Farm share, and she was under the impression that she would receive a greater quantity and variety of vegetables. Mildred is also inclined to use the court system rather than raise her concerns with Ingrid. At the end of the season, Mildred files a lawsuit against Ingrid claming Ingrid’s sale of the CSA share was fraudulent. Ingrid tells her co-members at Sun Sisters Farm, LLC about the suit immediately and asks for the farm business to defend her. At first, some of the other members are hesitant—they aren’t sure if the farm can afford this process ... and they might be wondering if Ingrid should be personally responsible, not the farm business as a whole. While trying not to offend Ingrid, they explore the issue of whether Ingrid made the sale in her capacity as a member of the LLC. Considering that Ingrid made the sale through the farm business and her sale was a perfectly reasonable exercise of her authority within the farm, the members realize that Article 5.3.1 requires the LLC to defend Ingrid. The business must “indemnify” Ingrid. The members contact their insurance company immediately to get the ball rolling on a defense.

Article 6: Transfers of Interest⁶⁴

Section 6.1: Transfers

Except as permitted by this Agreement, a Member shall not Transfer any portion of the Member’s Interest. “Transfer” means to sell, assign,⁶⁵ give, bequeath, pledge, or otherwise encumber, divest, dispose of, or transfer ownership or control of all of, any part of, or any interest in a Percentage Interest to any person or entity, whether voluntarily or by operation of law, whether before or upon death. The Transfer of all or a portion of an Interest does entitle the transferee to become a Member or to exercise any rights of a Member.⁶⁶ Unless provided otherwise by this Agreement, a transferee shall be entitled to receive only the distributions to which the transferor would be entitled. The transferee shall not be admitted as a Member unless approved by unanimous consent of the Members who are not transferring their Interests.⁶⁷ Unless and until the transferee is admitted as a member, the determination of majority consent for all purposes shall be made by excluding the Percentage Interest held by the transferee.⁶⁸

⁶⁴ Here’s a plain-language summary of Article 6: A member can’t sell or give away his or her interest in the LLC without approval of the other members and without following the process set forth in the agreement, which includes a “right of first refusal” by the other members. If a member tries to transfer their interest without following the process, it is invalid. Such an elaborate process as the one included in this model agreement is certainly not required. Indeed, you could just simply require that all members unanimously—or a supermajority or a majority—agree to the transfer, otherwise it is not allowable. Or, you could openly allow any and all transfers (which is generally not advisable), but it’s up to you.

⁶⁵ This definition of transfer includes an assignment, which basically means to transfer a right or set of rights. This prohibits assignment unless the provisions set forth in Article 6 are followed. Many LLCs prohibit assignment because they don’t want a member voting on LLC matters if the member does not have a financial interest in profits and distributions.

⁶⁶ If someone takes over a member’s interest in the company, then the new member receives distributions only—not voting rights. Here’s what this means. Let’s say a member goes on vacation to another state, causes a vehicle accident, and is sued by the injured person. Let’s also say that the member doesn’t have car insurance and the injured person goes after the member’s personal assets for compensation. The member’s interest in this LLC is a personal asset. If the injured person successfully sues the member, the court could award the injured person the member’s interest in this LLC. With this provision, that injured person gets a right to receive any distributions (remember, that’s cash or property paid out to members) that would have been made to the member. But, the injured individual can’t vote on issues—they don’t become a “real” member, basically.

⁶⁷ Even if an interest is transferred, the transferee won’t become an actual member with voting privileges, etc. unless a majority of the members agree to make them a full member.

⁶⁸ Given the transferee doesn’t have voting rights, their percentage interest will be excluded from the mix when counting up votes to get a majority. For example, if the transferee has a 10 percent interest, then the total percentage interest of members will actually be 90 percent, and it will just take a consent of 46 percent to get a majority.

Section 6.2: Voluntary Withdrawal

No Member shall have the right or power to voluntarily withdraw from the Company, except as otherwise provided by this Agreement.⁶⁹

Section 6.3: Member’s Right of First Refusal⁷⁰

In the event a Member wishes to Transfer such Member’s Interest, such Member (the “Transferring Member”) shall first be required to provide the Manager(s) and the other Members with a written offer (“Offer”) that shall set forth the following: (a) the intention to Transfer; (b) the name and address of the prospective transferee; (c) the Interest being offered (“Offered Interest”); and (d) the terms and conditions of the Transfer, including the purchase price for the Offered Interest.

⁶⁹ This reiterates Article 2.5 (and explanation in footnote 23) that a member can’t simply withdraw from the company and expect the return of their capital investment, which is generally the default rule of state LLC laws and regulations. It’s important to include this provision to protect the company from cash flow and other issues resulting from a member’s arbitrary decision to simply withdraw their interest.

⁷⁰ Requiring this right-of-first-refusal process gives the members the opportunity to keep all interests in the company within the existing members versus allowing any member to just transfer their interest to some stranger.

• Section 6.3.1: Acceptance Offer

Each of the remaining Members may elect within 45 days after receipt of the Offer to purchase his or her prorated portion of the Offered Interest by giving written notice within such 45 day period to the Transferring Member and to the Company.

• Section 6.3.2: Pro Rata Portion

For purposes of this Section 6.3, each accepting Member’s pro rata portion of the Offered Interest is that proportion of the Offered Interest as the Interest held by such accepting Member(s) bears to the Interests held by all other accepting Members. If any accepting Member elects not to accept all or any part of his or her pro rata portion of the Offered Interest, the Member(s) shall give written notice on or before the 35th day after receipt of the Offer of the Member’s election to the other accepting Member(s). The Accepting Member(s) may accept his or her respective pro rata portion of that accepting Member’s pro rata portion of the Offered Interest.⁷¹

⁷¹ This article basically allows each member the opportunity to purchase a portion of the offered interest based on his/her percentage interest. If one or more choose not to purchase their share, then it is offered to the members (if any) who have chosen to purchase their portion. This way, everyone gets an equal chance to further buy into the company, and the members as a whole have the opportunity to keep the interest within their group instead of having it transferred to some outsider.

• Section 6.3.3: Offer Not Accepted as to All Interests

If the accepting Member(s) has not elected to accept all the Offered Interest within the time periods specified above, the Transferring Member may Transfer the Offered Interest to the prospective transferee named in the Offer as provided in Section 6.3, such transfer to be made only in strict compliance with the terms set forth in such statement and to be completed within 90 days following the expiration of the time provided for the election by the Member to accept the Offered Interest, after which time any such Transfer shall again become subject to all the restrictions of this Agreement.

Section 6.4: Interests Not Subject to Restrictions

Notwithstanding any other provision of this Agreement to the contrary, the restrictions on Transfer of a Member’s Interest set forth in this Agreement shall not apply, subject to Section 6.1, to the gift, by bequest or otherwise, of Membership Rights to the spouse of a Member, to a Member’s lineal descendants, or to trusts for the benefit of a Member’s spouse or lineal descendants, which Transfers may take place after the date of the execution of this Agreement and are hereby consented to by the Member.⁷²

⁷² This means members can transfer interests to their spouse, their children, and to any trust members might create to manage property or assets without first getting unanimous consent. This is most useful regarding wills: If members leave their interest to each other, their children or a trust, it may be easier to execute with this provision. Check with an attorney for more information on planning the estate. Oftentimes operating agreements also permit transfers to other members without first getting unanimous consent, which is something you may want to consider including in this list. Note that this is subject to Article 6.1, which means that the transferee doesn’t automatically become a member with voting rights until and unless all members unanimously agree to admit them as a member.

Section 6.5: Effect of Transfer

In the event of any Transfer accomplished in accordance with this Agreement, including a Transfer permitted by Sections 6.3 or 6.4, the transferee and transferee’s spouse, if any, shall receive and hold the Interest transferred subject to the terms and provisions of this Agreement. The transferee shall be subject to the obligations of the transferor set forth in this Agreement and shall, upon request by the Company or any Member, execute an endorsement to this Agreement.⁷³

Section 6.6: Void Transfers

Any Transfer of any Interest by a Member shall be deemed void, and the Company shall not record or recognize any such Transfer, until there has been compliance with the provisions of this Agreement.⁷⁴ If no Offer is made as herein required, the Company and the Member may nevertheless exercise their rights hereunder as to the Interest being transferred, and they may do so at any time, even after the Transfer of the Interest.

Section 6.7: Involuntary Transfers

An Involuntary Transfer will be effective only after compliance with applicable provisions of this Section 6.7.⁷⁵ The creditor, receiver, trust or trustee, estate, beneficiary, or other person or entity to whom a Percentage Interest is Transferred by Involuntary Transfer (the “Involuntary Transferee”) will have only the rights provided in this Section 6.7.

⁷³ This basically means that if a transfer is effective, the transferee (i.e., the one that now holds the interest) must sign and abide by the operating agreement.

⁷⁴ A void transfer means it’s as if it never happened. That means that even if Member A sold their share of the company for cash to Member Z without consent, the transfer is void. Then Member A is still a member and can conduct business on behalf of the LLC. If Member Z, not knowing that the transfer is void, votes or takes action on the LLC, those actions are void.

⁷⁵ An involuntary transfer typically happens as a matter of law because of a default of some kind, whether through a creditor taking the interest, bankruptcy, foreclosure, etc. This article basically means that whoever receives the interest through such a scenario is obligated to immediately notify the members of the LLC that they have seized the interest. Otherwise, they have no legal rights to future distributions.

• Section 6.7.1: Definition

“Involuntary Transfer” means any Transfer of a Percentage Interest by operation of law or in any proceeding, including a Transfer resulting from the dissociation of a Member, by or in which a Member would, but for the provisions of this Section 6.2, be involuntarily deprived of any interest in or to the Member’s Percentage Interest. “Involuntary Transfer” includes, without limitation, (a) a Transfer from bankruptcy, (b) any foreclosure of a security interest in the Percentage Interest, (c) any seizure under levy of attachment or execution, or (d) any Transfer to a state or to a public office or agency pursuant to any statute pertaining to escheat (the reversion of property to the state upon its owner’s death when an heir does not exist), abandoned property or forfeiture.

• Section 6.7.2: Notice to the Company

The Transferor and the Involuntary Transferee shall each immediately give written notice to the Company describing the event giving rise to the Involuntary Transfer; the date on which the event occurred; the reason or reasons for the Involuntary Transfer; the name, address and capacity of the Involuntary Transferee; and the Percentage Interest involved (a “Notice of Involuntary Transfer”).

• Section 6.7.3: Effect of Involuntary Transfer

Upon the receipt of the Notice of Involuntary Transfer, the Involuntary Transferee shall have the rights of an assignee of the Transferor’s Percentage Interest as set out in section 183.0704(1) (b) of the Wisconsin Limited Liability Company Law.⁷⁶ Unless and until the Involuntary Transferee is admitted as a member by unanimous consent, the Percentage Interest held by the Involuntary Transferee shall have no voting rights.⁷⁷

⁷⁶ As discussed earlier, one reason to write an operating agreement is to outline when and how the LLC members want to deviate from the “default” rules provided by state law. That’s the role of this reference to Wisconsin law—it helps the company clearly communicate how it relates to state law. It may not be strictly necessary at times, but it’s always a best practice.

⁷⁷ Members can always admit the Involuntary Transferee as a member, if wanted. Recall that until and unless that’s done, the percentage interest held by the transferee will be excluded from the majority vote.

Section 6.8: Effect of Dissociation

The dissociation of a Member will not entitle a Member to a distribution in redemption of the Member’s Percentage Interest. An event of dissociation under section 183.0802(1)(d)–(k) of the Wisconsin Limited Liability Company Law will be treated as an Involuntary Transfer pursuant to Section 7.4 of this Agreement.⁷⁸

⁷⁸ This article is basically restating Article 2.5 (and explanation in footnote 23): Members cannot withdraw and demand return of their capital contributions or capital account. It’s helpful to repeat it here in the specific context of transfer and incorporate a state law citation just to be sure it’s clear.

Article 7: Books, Records and Accounting

Section 7.1: Bank Accounts

All funds of the Company shall be deposited in a bank account or accounts opened in the Company’s name. The Manager(s) shall determine the institution or institutions at which the accounts will be opened and maintained, the types of accounts and the Persons who will have authority with respect to the accounts and the funds therein.⁷⁹

Section 7.2: Books and Records⁸⁰ 

Section 7.2.1:

The Manager(s) shall cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company’s business. The records shall include, but not be limited to, complete and accurate information regarding the state of the business and financial condition of the Company, a copy of the Certificate of Formation and this Agreement and all amendments thereto, a current list of the names and last known business, residence or mailing addresses of all Members, and the Company’s federal, state and local tax returns.

⁷⁹ It’s important that the LLC has a separate banking account to ensure that its funds are not inappropriately commingled with the funds of its members.

⁸⁰ This Article basically says that all members have access to the books and records of the company; however, they must pay for any costs the company incurs in inspection, including copying.

• Section 7.2.2:

The books and records shall be maintained in accordance with sound accounting practices consistently applied and shall be available at the Company’s principal place of business for examination by any Member or the Member’s duly authorized representative at any and all reasonable times during normal business hours. The Company shall maintain reasonable internal controls to safeguard its assets and business.

• Section 7.2.3:

Each Member shall reimburse the Company for all costs and expenses incurred by the Company in connection with the Member’s inspection and copying of the Company’s books and records.

Section 7.3: Annual Accounting Period

The annual accounting period of the Company shall be the calendar year. The Company’s taxable year shall be the calendar year, subject to the requirements and limitations of the Internal Revenue Code of 1986 (“Code”) and Regulations.⁸¹

⁸¹ For tax purposes, some companies prefer to designate their accounting period to end on another date, such as March, June, September—mostly based on the predicted cycle of profits and losses. You should consult an attorney or your accountant to determine what would be best based on your specific farming operation.

Section 7.4: Reports to Member

Within 75 days after the end of each taxable year of the Company, the Manager shall cause to be sent to each Person who was a Member at any time during the taxable year then ended: (i) an annual report, prepared by the Company’s independent accountants in accordance with generally accepted auditing standards and expressing an unqualified opinion on the financial statements presented therein; and (ii) a report summarizing the fees and other remuneration paid by the Company to any Member or any Affiliate in respect of the taxable year. In addition, within 75 days after the end of each taxable year of the Company, the Manager shall cause to be sent to each Person who was a Member at any time during the taxable year then ended that tax information concerning the Company necessary for preparing the Member’s income tax returns for that year.⁸²

⁸² Some states require that annual reports are prepared and filed with the secretary of state or financial institutions agency. Regardless, it can be beneficial for the company to require that an annual report is prepared, which keeps all members informed of key issues related to the farm operations. It’s also important to ensure that all requisite tax information is sent to each member each year, as the LLC entity does not itself pay taxes. Rather, each member is required to account for their respective profit/loss related to the company on their individual tax returns.

Section 7.5: Tax Matters Member

A Member shall serve as the Company’s tax matters partner (“Tax Matters Member”). The Tax Matters Member shall have all powers and responsibilities of a “tax matters partner” as defined in Section 6231 of the Code. The Tax Matters Member shall keep all Members informed of all notices from government taxing authorities that may come to the attention of the Tax Matters Member. The Company shall pay and be responsible for all reasonable third-party costs and expenses incurred by the Tax Matters Member in performing those duties. A Member shall be responsible for any costs incurred by the Member with respect to any tax audit or tax-related administrative or judicial proceeding against any Member, even though it relates to the Company. The Tax Matters Member shall not interfere with any dispute with the Internal Revenue Service without the approval of the Member.⁸³

Section 7.6: Tax Elections

The Company shall make those elections permitted under the Internal Revenue Code and Regulations, including, without limitation, elections of methods of depreciation and elections under Section 754 of the Code, as approved by a Majority Vote of the Members.⁸⁴

⁸³ All states require that a tax matters member be designated, who will ultimately be responsible for keeping all members informed of tax-related issues. This provision explains that since the company itself doesn’t pay taxes, each member is responsible for their own tax matters. In particular, the tax matters member must stay out of the way and cannot get involved in any dispute that a member has with the IRS unless that member approves.

⁸⁴ Tax laws offer some flexibility in how certain allocations and accounting for depreciation of company and/or member assets are made. This article basically allows the LLC members to decide these tax issues by a majority vote. However, members are advised to consult with an attorney or accountant when making such decisions.

Section 7.7: Title to Company Property

All real and personal property acquired by the Company shall be acquired and held by the Company in its name.⁸⁵

Section 7.8: Valuation of Company Assets and Interests⁸⁶ 

• Section 7.8.1: General

In the event that the Fair Market Value of a Company asset or Interest must be determined, such value shall be determined by a Majority of the Members, each acting in good faith. Within 90 days after such determination, the determining party shall provide notice thereof to all the other Members (a “Valuation Notice”).

• Section 7.8.2: Dispute

In the event that, within 30 days after having been given a Valuation Notice, any Member (an “Objecting Member”) provides notice to the Company asserting that the value set forth in such Valuation Notice is materially inaccurate due to manifest error (a “Dispute Notice”), the Company and the Objecting Member shall undertake reasonable efforts to resolve their differences regarding such valuation through consultation and negotiation. In the event that the Company and the Objecting Member agree upon a revised Fair Market Value, such revised value shall be set forth in a new Valuation Notice to all the Members. In the event that the Company and the Objecting Member do not reach agreement within 60 days after the date of the Dispute Notice, the Objecting Member may, by notice to the Company within 30 days after the end of such 60-day period, require that the matter be submitted to mediation pursuant to Section 9.8.

⁸⁵ Most companies prefer that property titles, including land and farm equipment, be held in the name of the company and not its members. This does not apply to leases, only things that are “owned” in whole or in part by the company. If your farm operation includes land or equipment that is co-owned or involved in some other unique ownership arrangement where the company does not have full title, then this provision would need to specify that.

⁸⁶ Determining the valuation, or projected overall worth, of a company can be a subjective process. There are many ways of doing it and everyone will have an opinion, particularly when they have a vested interest. It is an essential exercise, as among other things, it will help determine the value of each member’s percentage interest in the company. Article 7.8 says the valuation is to be determined by the majority of the members, but also provides a process for disputes. Other options could include specifying precise calculations based on accounting principles. Regardless, it’s recommended that you include a protocol for determining the valuation in the operating agreement, as this area is ripe for contention.

Article 8: Dissolution And Liquidation

Section 8.1: Events of Dissolution

The Company shall be dissolved, and shall terminate and wind up its affairs, upon the first to occur of the following: (a) the determination by the Members to dissolve the Company;⁸⁷ or (b) the entry of a decree of judicial dissolution pursuant to 183.0902 of the Wisconsin Limited Liability Company Law.⁸⁸ The death, retirement, resignation, expulsion or bankruptcy of a Member, or the occurrence of any other event which otherwise terminates the continued membership of a Member in the Company shall not result in the dissolution of the Company.

Section 8.2: Procedure for Winding Up and Dissolution

If the Company is dissolved, the Members shall be collectively responsible for winding up its affairs.⁸⁹ On winding up of the Company, the assets of the Company shall be distributed, first, to creditors of the Company, including Members who are creditors, in satisfaction of the liabilities of the Company. Then, amounts in excess of any reserves deemed reasonably necessary by the Members to pay all of the Company’s claims and obligations shall be distributed to the Members in accordance with Section 4.5 of this Agreement.

Section 8.3: Termination

The Members shall comply with any requirements of applicable law pertaining to the winding up of the affairs of the Company and the final distribution of its assets. Upon completion of the winding up, liquidation and distribution of the assets, the Company shall be deemed terminated.

⁸⁷ Although no single member can withdraw without consent of the other members, the members together can unanimously agree to dissolve the entire company.

⁸⁸ A court can require an LLC to dissolve. This can happen if one member is “oppressing” other members, such as by threatening them, or, if the LLC isn’t acting in accordance with the operating agreement or the members are doing something illegal. Those are very, very unlikely to ever happen. But, you can be administratively dissolved if you fail to file your annual report with the state (it’s easy and they send you a reminder) for five years in a row or so. You then have a year or two to file for reinstatement—if you don’t, your LLC is gone.

⁸⁹ This means that if an LLC is dissolved, members won’t ignore the dissolution by carrying on business as usual.

Article 9: Amendments; General Provision; Investment Representations

Section 9.1: Assurances

Each Member shall execute all certificates and other documents and shall do all such filing, recording, publishing and other acts as the Members deem appropriate to comply with the requirements of law for the formation and operation of the Company. Each Member shall also comply with any laws, rules and regulations relating to the acquisition, operation or holding of the property of the Company.⁹⁰

⁹⁰ This requires that all members do what’s necessary to make sure that all documents are signed, amended and filed with state or federal agencies and others, including creditors, so that the company is legally sound at all times.

Section 9.2: Notifications

Any notice, demand, consent, election, offer, approval, request or other communication (collectively a “notice”) required or permitted under this Agreement must be in writing and either (a) delivered personally, (b) sent by certified or registered mail, with postage prepaid and a tracking number (c) sent by a nationally reputable private carrier, or (d) sent by email or text. A notice must be addressed to a Member at the Member’s last known address or transmitted to the Member’s last known email address or mobile number accepting texts on the records of the Company. A notice to the Company must be addressed to the Company’s principal office or to the official email address provided on the records of the Company. A notice delivered personally will be deemed given only when acknowledged in writing by the person to whom it is delivered. A notice that is sent by mail will be deemed given three business days after it is mailed. A notice sent by reputable overnight carrier will be deemed given on the date of delivery indicated on the carrier’s delivery slip (no recipient signature required). A notice sent by email or text will be deemed given when sent. Any party may designate, by notice to all of the others, substitute addresses or addressees for notices; thereafter, notices are to be directed to those substitute addresses or addressees.⁹¹

⁹¹ It’s important to clearly set forth how any “notice” required by the provisions of the operating agreement will be delivered. This all sounds quite formal, but the formalities protect the members by ensuring that they have been properly notified well in advance of any significant issues. It helps that it’s in writing. Here, email and text is provided as an option for giving notice. It’s entirely up to you to decide how you prefer notice to be given.

Section 9.3: Specific Performance

The parties recognize that irreparable injury will result from a breach of any provision of this Agreement, and that monetary damages will be inadequate to remedy the injury fully. Accordingly, in the event of a breach or threatened breach of one or more of the provisions of this Agreement, any party who may be injured (in addition to any other remedies which may be available to that party) shall be entitled to one or more preliminary or permanent orders (a) restraining and enjoining any act that would constitute a breach, or (b) compelling the performance of any obligation that, if not performed, would constitute a breach.⁹²

⁹² Specific performance is a type of remedy that is specified in contracts where paying monetary damages wouldn’t make the parties whole if the agreement is breached. For example, if you spend 30 years farming your land with blood, sweat and tears, and one of the members somehow breaches the operating agreement and illegally takes title to the land, that member’s payment of the market value of the land may not adequately remedy the situation. Instead, the member would have to transfer title back to the company.

Section 9.4: Complete Agreement

This Agreement constitutes the complete and exclusive statement of the agreement among the Members and the Company. It supersedes all prior written and oral statements, including any prior representation, statement, condition or warranty.⁹³

⁹³ This is typical contract legalese to confirm that any drafts or side agreements entered into by members are superseded by this agreement if a conflict were to arise.

Section 9.5: Applicable Law

All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal law, not the law of conflicts, of the State of Wisconsin.⁹⁴

⁹⁴ This is a fancy way of saying that the laws of Wisconsin will apply to any disputes arising from this contract. When disputes involve parties or incidents from multiple states, courts apply a legal doctrine called the “law of conflicts” to determine which state’s law applies. One benefit of a contract is that the parties can agree upfront which state’s law applies, regardless of the “law of conflicts” doctrine. It’s important to designate which state’s laws will govern the agreement, even if all your operations and your members are in one state, as otherwise creditors or other interest holders could bring you to court elsewhere.

Section 9.6: Section Titles

The headings herein are inserted as a matter of convenience only and do not define, limit or describe the scope of this Agreement or the intent of the provisions hereof.⁹⁵

⁹⁵ This is typical contract legalese to guide the courts in interpreting the agreement if a dispute arises.

Section 9.7: Binding Provisions

This Agreement is binding upon, and inures to the benefit of, the parties hereto and their respective heirs, executors, administrators, personal and legal representatives, successors and permitted assigns.⁹⁶

⁹⁶ This basically means that this agreement is binding on anyone who gets a legitimate interest in the company, even if they don’t sign the agreement.

Section 9.8: Dispute Resolution⁹⁷

If a dispute arises out of this Agreement, or a breach hereof, or otherwise develops between or among the Members and/or Managers with respect to the Company and/or its operation, business or affairs, then the Members and the Managers affected shall (before resorting to arbitration, litigation or any other dispute-resolution procedure) each proceed to negotiate with each other in good faith, on a commercially reasonable basis. They must meet in person with one another at least three times in an effort to reach a resolution. If no resolution has been reached after such efforts, then they shall proceed to mediation administered by the American Arbitration Association under its Commercial Mediation Rules. If mediation is not successful in resolving the entire dispute, or is unavailable, any outstanding issues shall be submitted to final and binding arbitration in accordance with the laws of the State of Wisconsin. The arbitrator’s award will be final and the judgment may be entered upon it by any court having jurisdiction within the State of Wisconsin.

⁹⁷ It is highly recommended that you include a dispute-resolution clause. Here, mediation is preferred as it is generally the least expensive and most efficient way for resolving disputes. While many consider them effective for achieving just outcomes, both litigation and arbitration can be timely and expensive regardless of a “winning” outcome, the former more so than the latter. The key is to have a clear and comprehensive operating agreement so that disputes do not arise, but you can never be entirely sure they won’t. So as a safeguard, consider the worst-case scenario, a super-messy dispute involving facts and he said, she said opinions, and then determine how you’d want the dispute to be resolved so that you can get on with your farming operations.

Section 9.9: Terms

Common nouns and pronouns shall be deemed to refer to the masculine, feminine, neuter, singular and plural, as the identity of the Person may in the context require.⁹⁸

⁹⁸ This ensures that all terms are interpreted to include all parties, even if a singular is used. It’s more legal jargon.

Section 9.10: Separability of Provisions⁹⁹

Each provision of this Agreement shall be considered separable. If, for any reason, any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement that are valid.

Section 9.11: Counterparts

This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which, when taken together, constitute one and the same document. The signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart.¹⁰⁰

Section 9.12: Investment Representations¹⁰¹

The Interests have not been registered under the Securities Act of 1933, as amended, or any state securities laws (collectively, the “Securities Acts”), because the Company is issuing the Interests in reliance upon the exemptions from the registration requirements of the Securities Acts, and the Company is relying upon the fact that the Interests are to be held by each Member for investment. Accordingly, each Member hereby confirms the following representations:

⁹⁹ This article basically provides that if a court were to interpret one article of this agreement as illegal or otherwise invalid, the other sections of the operating agreement will still stand.

¹⁰⁰ This is legal jargon that basically allows members to sign the agreement on separate pieces of paper.

¹⁰¹ These articles offer some measure of protection to the company because by signing this agreement, the members are each effectively making certain representations regarding their qualifications and fitness to serve as a member. Also, each member is effectively making certain representations regarding their investment objectives, which are necessary representations to comply with state and federal securities laws. If these provisions are not included in the operating agreement, it is advisable that you have all members sign an investment representation letter upon making their initial capital investment, which will effectively do the same thing.

• Section 9.12.1:

Interests have been acquired for such Member’s own account for investment and not with a view to the resale or distribution thereof, and may not be offered or sold to anyone unless there is an effective registration or other qualification relating thereto under all applicable Securities Acts, or unless such Member delivers to the Company an opinion of counsel, satisfactory to the Company, that such registration or other qualification is not required;

• Section 9.12.2:

The Member understands that the Company is under no obligation to register the Interests or to assist any Member in complying with any exemption from registration under the Securities Acts;

• Section 9.12.3:

The Member is experienced in evaluating and investing in companies such as the Company.¹⁰² The Member is aware of the Company’s business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Interests;

• Section 9.12.4:

The Member understands that: (i) the Company is a newly formed limited liability company with no prior operating history, revenues or earnings; (ii) there can be no assurance as to the amount, if any, of revenues or profits that the Company may generate; (iii) an investment in the Interest is highly speculative; (iv) investors must accept the risk of potentially losing their entire investment in the Company; (v) the Company has only very limited amounts of cash and may be required to obtain additional cash in order to finance its operations; and (vi) there can be no assurance thatthe Company will be able to obtain additional capital on acceptable terms or at all.

¹⁰² Again, these provisions are provided to protect the Company. By signing this agreement, the members are representing that they have some level of savviness in understanding how businesses operate and the risks involved. It does not necessarily mean that a member is an expert or even has prior experience in an LLC. Ultimately, it means they are taking this seriously, have done the due diligence or research into the business affairs prior to signing on as a member and making their capital contribution, and realize that they have no right to get their money back.

• Section 9.12.5:

The Member acknowledges that the Company has not made any representation or warranty, either express or implied, to Member regarding the Company, the Interest or the investment in the Interests.

Exhibit A:

[The Articles of Organization]

Exhibit B: Member Capital Contributions

Based on our story of Sun Sisters Farm, LLC, the following is what Appendix B would look like at the outset.

Name & Contact Info	Capital Contribution	Percentage Interest
Marie Sister 33 Appleview Ln Madison, WI marie@sunsister.com	$45,000 farm property	45%
Jema Sister 44 Creekside St Madison, WI jema@sunsister.com	$30,000 cash	30%
Ingrid Sister 55 Suncircle Rd Madison, WI ingrid@sunsister.com	$25,000 services	25%
Total	$100,000	100%

Exhibit B: Member Capital Contributions - Amendment 1

The following is what Appendix B would look like once Margo Friend is brought on as a member.

Name & Contact Info	Capital Contribution	Percentage Interest
Marie Sister 33 Appleview Ln Madison, WI marie@sunsister.com	$45,000 farm property	40.9%
Jema Sister 44 Creekside St Madison, WI jema@sunsister.com	$30,000 cash	27.3%
Ingrid Sister 55 Suncircle Rd Madison, WI ingrid@sunsister.com	$25,000 services	22.7%
Margo Friend 66 Crabtree St Madison, WI margo@sunsister.com	$10,000 cash	9.1%
Total	$110,000	100%

Exhibit B: Member Capital Contributions - Amendment 2

The following is what Appendix B would look like once Marie leaves, Jema buys her pro rata share of Marie’s interest, and Juliet buys Marie’s remaining interest but is not brought on as a member so has no voting rights.

Name & Contact Info	Capital Contribution	Percentage Interest
Jema Sister 44 Creekside St Madison, WI jema@sunsister.com	$30,000 cash (initial) $27,600 cash (additional)	46%
Ingrid Sister 55 Suncircle Rd Madison, WI ingrid@sunsister.com	$25,000 services	20%
Margo Friend 66 Crabtree St Madison, WI margo@sunsister.com	$10,000 cash	8%
Juliet Friend 33 Appleview Ln Madison, WI juliet@sunsister.com	$32,400 cash	26%*
Total	$125,000	100%
* A non-voting member.

Appendix C

This would include the following for Ingrid and Margo as the managers:

• job description outlining the roles and responsibilities
• employment agreements
• details of compensation package

Checklist: Preparing Your Farm’s LLC Operating Agreement

Using This Checklist

Are you ready to start putting together your operating agreement? This checklist with explanations details basic issues that should be addressed in a thorough and well-considered operating agreement. Not all questions will be relevant in every situation. One way of thinking about all of the issues on this checklist is to imagine the worst-case scenario–no matter how far-fetched–and then figure out how you’d want each scenario to be handled.

Once you have a basic understanding of the answers to these questions, you might be ready for the next step: drafting. However, drafting an operating agreement can be challenging and may not be the best use of a farmer’s limited time. Bring your responses to these questions to a qualified attorney. Armed with this information, he or she should be able to assemble a terrific operating agreement that is consistent with the laws of your state.

Keep in mind that your operating agreement must comply with certain baseline requirements set forth in your state’s LLC statute. Given these statutes vary from state to state, Farm Commons highly recommends that you work with an attorney to help you through the process. If you decide to draft the operating agreement yourself, you should have an attorney review it. This will help assure that all of the provisions are in line with your state’s statute and that none of the provisions contradict each other, which is sometimes hard to spot. Internal contradictions result in confusion, which can lead to disputes. This would defeat the purpose of having an operating agreement.

This checklist is designed to be used with the other resources provided in the LLC section of this Guide, including the Extensive Operating Agreement for Sun Sisters Farm, LLC and the Brief Operating Agreement for Happy Couple Farm, LLC.

Summary Checklist

Financial Matters

• What is everyone contributing to the business, financially?
• How are profits and losses handled?
• When is the decision made, and who decides whether to hand out or “distribute” profits to the members?

Management Matters

• Who makes the day-to-day decisions? That is, will the LLC be manager- managed or member-managed?
• What is the protocol for making day-to-day decisions?
• Are there any particular roles, responsibilities or benefits of any members or managers you want to specify?

Meetings and Voting Matters

• Will you have an annual meeting and, if so, when?
• How are members informed about the time and place of meetings and how meetings can be conducted?
• Who has voting rights and upon what are they based?

“Big” Decisions

• Will you allow additional members and, if so, who decides?
• What happens if a member wants to leave, or if a member’s interest in the company is somehow passed on to someone else?
• Who decides whether the company takes on debt?
• Who decides whether to close the company?
• Who decides whether existing members can make additional capital contributions?
• Who decides on amendments to the operating agreement?
• Who decides whether the company can change hands (i.e., be acquired or merged with another company)?
• How are all other “big” decisions (i.e., not day-to-day decisions) made?

Checklist with Explanations

Financial Matters

• What is everyone contributing to the business, financially?

Another way of saying this is, what is the form and value of each member’s (the LLC term for “owners”) initial “capital contribution”? The idea is that each member brings something to the table–whether it be cash, land, equipment, past or future services, or other things that are valued as capital.

What each member offers is called a capital contribution. It is important to determine upfront and put in writing the form and value of each member’s capital contribution for a number of reasons. First, the LLC needs to be adequately capitalized to be legally legitimate. What is considered adequate will depend on your business. A basic rule of thumb is that you need enough to pay the bills as they come due. Also, the value placed on the capital contribution of each member will coincide with his or her ownership share or “percentage interest” in the company. The percentage interest breakdown may have significant implications as we’ll discuss throughout this checklist, such as how profits and losses are dealt with and what voting rights are based on.

Keep in mind that once capital is offered to the company, it is no longer considered a personal asset. It is now a company asset and the member has no right to get the capital back or to expect anything in exchange for it. This is what makes a capital contribution different than a loan, lease, or sale of land or equipment. In effect, members are liable for the LLC’s debts only to the extent or amount that each has contributed to the LLC. It’s each member’s “stake” in the business.

• How are profits and losses dealt with?

Unlike corporations, LLCs have flexibility in allocating and distributing profits and losses. Profits and losses are revenue minus expenses. If you have more coming in than going out, you have a profit. If you have less coming in than going out, you have a loss. The LLC is required to establish how profits and losses are allocated to the members for tax purposes. The allocation of profits and losses will affect the tax basis on each member’s individual tax return.

Profit and loss allocation could be based on the percentage interest breakdown, equal distribution (i.e., if there are three members, each gets one-third allocation regardless of percentage interest), or some other determinant. A member may want to allocate losses in a unique way to lower their tax basis. Farm Commons strongly recommends that you seek the guidance of your accountant or tax attorney if you want to allocate profits and losses on something other than the percentage interest.

• When is the decision made, and who decides whether to hand out or “distribute” profits to the members?

A distribution is when the LLC actually gives members money or property based on profits. This is more akin to a dividend to shareholders in a corporation and is different than a salary or wage.

What is your preferred timing for making distributions?

Typically, the decision is made annually based on year-end accounting. However, you could choose to allow to decide more or less frequently (e.g., every six months or every two years).

How is the decision made?

You could require unanimous consent of all members, a supermajority or a simple majority vote. See more below on voting and decision-making options. Or, you could specify that profits will be distributed only if the company has cash reserves above a certain amount. Some LLCs choose to place a high threshold on the decision to distribute profits, particularly early on, as they feel it is important to reinvest profits back into the company. Believe it or not, the distribution of profits is the source of a lot of internal battles in companies.

It’s best to determine upfront what is ideal for the timing and process of distribution of profits and to put it in writing. This way everyone will know what to expect. Also keep in mind that state statutes generally prohibit distributions if doing so would jeopardize the company’s ability to pay its bills.

Management Matters

• Who makes the day-to-day decisions?

Another way of saying this is, will the entity be “member-managed” or “manager- managed”? Most states have a default rule that the LLC is managed by its members unless otherwise provided for in the operating agreement. If you have just a few members, you’ll want to keep the day-to-day decisions and operations of the company in the hands of the members.

However, management issues can get rather cumbersome if you have many members, or just a few members with very diverse interests. A manager-managed structure addresses this by allowing you to designate a certain person or group of people as managers of the company. The manager(s) could be members or non- members–it’s up to you to decide the parameters.

The Extensive Operating Agreement for Sun Sisters Farm, LLC included in this Guide provides one example of a manager-managed LLC. The annotations also include a provision for a member-managed designation. The Brief Operating Agreement for Happy Couple Farm, LLC provides an example of a family-owned, member-managed LLC.

• What is the protocol for making day-to-day decisions?

Whether you decide to go the member-managed or manager-managed route, you still may want to include some basic guidelines on day-to-day operations in your operating agreement. Here are some questions to consider:

• Are day-to-day decisions made by a single person or a set of people?
• Who are the managers and how are they appointed or removed from thisrole?
• Will you have some sort of a voting process if multiple people are involvedin the day-to-day decisions?
• If you have an even number of members or managers, what happens ifthere’s a 50/50 split on a day-to-day decision?
• Are there restrictions on any day-to-day decisions, such as spending amounts?

It’s helpful to put such key aspects of your management protocol in your operating agreement so that everyone is on the same page and to ensure accountability.

Keep in mind, the operating agreement is not the place to lay out nitty gritty details on day-to-day decisions, but is rather the overarching protocol or framework for how those decisions are made.

• Are there any particular roles, responsibilities or benefits of any members or managers you want to specify?

You may want to set forth the details regarding expectations of certain members or managers in the operating agreement itself. The specifics could include a clear description of roles and responsibilities of key members or managers, somewhat like a job description. It could also include any special benefits such as salary, housing arrangements and health benefits that you may decide to offer any managers of the LLC (if you are a manager-managed LLC).

If you decide to include such details in your operating agreement, it’s best to incorporate them as a separate appendix. This will make it far easier to make changes and updates to these nuanced issues. Otherwise, you would have to consistently amend your operating agreement for minor details. Also, you should consider the protocol and threshold (e.g., majority, supermajority or unanimous consent) for making changes to this appendix. Do you want to make it less than what’s required for amending the operating agreement itself? For more on this, see the discussion on “big” decisions below.

Another option is to create an entirely separate employment agreement that will govern all your agreements with your manager(s). Or, you could have a separate member agreement that governs any special arrangements with particular members, such as roles and responsibilities, housing arrangements, health benefits, etc. Either way, you are encouraged to think through these details at the get go and put them in writing in some form.

Meetings and Voting Matters

• Will you have an annual meeting and, if so, when?

While state law doesn’t require it, it’s a good idea to have annual meetings for members to bring legitimacy to your company and to foster good relations with your members. Annual meetings are a perfect time to vote on “big” decisions, engage in strategic planning, and set and evaluate goals that will help your farming operation succeed. If you decide to hold annual meetings and designate a month or season for the meeting to be held, it’s important to stick to it.

• How are members informed of meetings and how can meetings be conducted?

Operating agreements also typically include a provision saying that in addition to the annual meeting, special meetings can be called if any big decisions need to be made. If you decide to have annual meetings or allow for special meetings, you’ll need to set clear ground rules for how your members are notified of the time and place of the meeting, as well as rules for how and where meetings are conducted.

• Can members be notified of a meeting via email?
• How far in advance must the notice or invitation to a meeting be given?
• Can meetings take place by phone or internet (e.g., Skype or GoogleHangout), or must they be in person?
• If a member with voting rights doesn’t know that a meeting is taking place and avote is held on an important issue, he or she could raise issue with the decision that was made. This could result in legal issues down the road.

• Who has voting rights and upon what are they based?

Voting rights will come into play for significant company decisions (and could even play a role in certain day-to-day management decisions if you decide to make your LLC member-managed). The following are some questions you’ll need to answer.

What is the basis of voting rights in your company?

The default rule in most state LLC statutes is that voting rights are based on the percentage interest of the members.

You could choose to structure voting rights some other way, such as one-member, one-vote. Or perhaps you want to designate one person as having the final say on everything or on certain matters. It’s entirely up to you.

Does every member have voting rights?

You could decide to tier your membership interests so that some members have voting rights while others don’t. It may be that you have members who don’t really care how the business is run. Or, maybe you don’t want them to have a say! On the other hand, you may have members who want a say in every aspect of the company. How you structure the voting rights is entirely up to you.

“Big” Decisions

“Big” decisions are typically addressed separately in the operating agreement, including specifying detailed protocols, establishing certain restrictions and setting a higher threshold for the decision-making process. A higher threshold would be unanimous consent or supermajority versus just a majority. What are the “big” decisions for your farm operation and how do you want to handle them?

The following are the typical “big” decisions that are addressed separately in operating agreements. You may have others that are unique to your farming operation. Again, one way of thinking about these issues is to imagine the worst- case scenario–no matter how far-fetched–and to then figure out how you’d want each scenario to be handled. Keep in mind that requiring unanimous consent protects initial founding members and safeguards their vision for how the company operates if additional members are added. However, it may be challenging to reach unanimous consent if you have many or even just a few diverse members. Operating agreements sometimes require only that a supermajority, usually defined as members owning at least three-quarters of the company, approve “big” decisions. This may be advisable if you anticipate it will be very challenging to get everyone to agree on anything.

It’s up to you to decide and clearly outline in your operating agreement what is required for making various types of decisions–whether a unanimous consent, supermajority, majority or something else.

• Will you allow additional members and, if so, who decides?

Sometimes owners decide upfront that they most likely will not want any additional members. This is often because they don’t want their own percentage interest in the company to be reduced or diluted. Dilution could reduce their share in profits and their voting power. However, it’s still recommended that a provision is included for a process to add new members. What if the business needs more funds? What if someone you like and trust wants to invest as a part owner? If you decide to include a provision for additional members, what is the threshold for the decision? Unanimous consent, majority, supermajority or something else?

• What happens if a member wants to leave, or if a member’s interest in the company is somehow passed on to someone else?

A member’s desire to leave or to transfer his or her interest in the company to someone else (voluntarily or involuntarily) will inevitably raise several issues. Voluntary transfers refer to the scenario when a member wants to leave and sell their interest to someone else. Involuntary transfers include events like a member’s death or default on a loan if the member listed their interest in the LLC as collateral. These scenarios are all considered “transfers” in LLC-speak. You should consider them all carefully and set forth detailed parameters in your operating agreement. Here are some guiding questions:

• If a member voluntarily decides to leave, how and when will his or her ownership interest be bought out?
• Can the leaving member automatically transfer his or her interest to another member of his or her choice?
• Can a member transfer his or her interest to a non-member?

◦ If so, what’s the protocol?

• Will that non-member automatically become a member with voting rights once he or she becomes an interest holder?
• Does there need to be a vote on the decision to allow a voluntary transfer?

◦ If so, what’s the threshold for the decision?

• As for involuntary transfers, what if a member dies?
• Will the deceased member’s interest transfer to his or her heirs?

◦ If so, will these heirs be voting members or simply interest holders?

• Will the deceased member’s interest somehow be allocated to existingmembers?
• What if a creditor acquires a member’s interest? Will the creditorautomatically have voting rights?
  

For some creative ideas on how to address decisions and issues related to transfers, read through Article 6 of the Extensive Operating Agreement for Sun Sisters Farm, LLC and the accompanying story. This sample operating agreement includes a right-of-first-refusal protocol that applies if a member wants to leave and transfer their interest to a non-member. The departing member has to first make an offer to existing members to give them the option to buy the departing member’s interest. This is just one way to address this issue and it may or may not be the best option for your farming operation. Either way, carefully think through the line of questions above to help you develop the right transfer provisions for your farm business.

• Who decides whether the company takes on debt?

Taking on debt will obviously impact the company’s financials. It will also ultimately affect the tax basis and overall interest of each member in the farm operation. Again, each member is liable up to their capital contribution. So, taking on debt puts them at risk. It’s very important to set parameters for how decisions involving debt are made.

• Do you want to require a member vote before any debt is incurred?
• Or, do you want to set a ceiling and anything above it requires a member vote?
• Is the ceiling based on a dollar amount or a percentage of company assets?
• If a vote is involved, what is the threshold? Unanimous consent, supermajority, majority or something else?

• Who decides whether to close the business?

Closing the business–or dissolution and winding up in LLC-speak–is obviously a big decision. Some members may be more optimistic than others and want to keep going if it no longer makes sense to keep the business running for whatever reason. Others may have a low tolerance for risk. Who decides whether and when to close the business? What is the threshold for making this decision? Unanimous consent, supermajority, majority or something else?

• Who decides whether existing members can make additional capital contributions?

You may need additional capital to address cash flow issues or to purchase equipment or land that the business needs to grow. While you could take out loans, another option is to seek additional capital contributions from members. However, this may change the percentage interest breakdown of the company. What’s the threshold for making this decision? Unanimous consent, supermajority majority or something else?

• Who decides on amendments to the operating agreement?

The operating agreement controls how the business runs. Amending the operating agreement can, in effect, change everything. What is the threshold for making this decision? Unanimous consent, supermajority majority or something else?

• Who decides whether the company can change hands (i.e., be acquired or merged with another company)?

The possibility could arise that someone or another company presents an offer to buy the farming business. While to some members it may seem like an offer you can’t refuse, to others it may be that the company has sentimental value to them and no amount of money would be enough to sell it. Even if you think it’s far-fetched, it’s important to set a threshold for decisions regarding a merger or acquisition in your operating agreement, as one never knows. What’s the threshold for making this decision? Unanimous consent, supermajority, majority or something else?

• How are all other decisions made?

Typically operating agreements have a default clause for decisions that are not specifically addressed in the operating agreement. Here are some questions to think about concerning other decisions not addressed in this checklist:

• What is your default threshold for any decision not specifically addressed in your operating agreement–unanimous consent, supermajority, majority or something else?
• Can you imagine any other “big decisions” that may arise that are unique to your farming operation? If so, what is the threshold for these decisions?
  • For example, does the farming operation have a special piece ofequipment or asset that you want to require unanimous consent beforethe company sells it or makes it collateral for a debt?
  • Or, do you want to require unanimous consent on a decision to launchan additional line of business, such as a value-added product line? The more you think through this now, the more your unique interests will be protected in the long run.

Next Steps

The intention of this checklist is to get you thinking about how you want to structure your LLC and to address certain potential scenarios. Once you’ve answered these questions, you’ll be ready to seek an attorney who can streamline the process of drafting your operating agreement.

Once you have your operating agreement in hand, be sure to follow the document. Following the rules and procedures detailed in your operating agreement gives the business legitimacy in court. It also helps facilitate good relations with your members or partners.

You should make copies or make it available in electronic form so that every member has the agreement and can refer to it as needed. It’s a good idea to keep your operating agreement in one binder along with all meeting minutes and any amendments so that they are all readily available. This also helps prove the legitimacy of your LLC by showing you are taking the separate entity seriously. Whenever you have a doubt about what’s required for making a decision or how to deal with a specific scenario when it arises, refer to your operating agreement for guidance.

Sample LLC Annual Member Meeting Minutes with Annotations

Annual Members Meeting Minutes for Sun Sisters Farm, LLC¹

The annual meeting of this limited liability company was held on February 11, 2018, at 2 PM at the Sun Sisters Farm, LLC office in Wisconsin.²

¹ Annual member meetings are not required by most state LLC statutes. However, if the LLC chooses to elect S corporation tax status, it must hold annual meetings. The IRS requires all S corporations, whether organized as an LLC or C corporation, to hold meetings to ensure a layer of accountability in the operation of the company. These meeting minutes are included as a sample should you choose to hold annual member meetings, regardless of whether you elect S corporation tax status for your farm operation LLC.

² The place, time and date information needs to be in line with whatever is specified, if anything, in the LLC’s operating agreement for holding annual meetings. For Sun Sisters Farm, LLC, the operating agreement does not specify an exact time or place. Your operating agreement could be more precise, such as specifying an exact month or the third Thursday of February, for example. If so, be sure that you follow what your operating agreement says and report it in your minutes.

The following members and/or managers were present at this annual meeting with the represented percentage interest:

• Marie Sister, member: 40.9 percent
• Jema Sister, member: 27.3 percent
• Ingrid Sister, member/manager: 22.7 percent
• Margo Friend, member/manager: 9.1 percentMarie was designated as chairperson, and Jema was designated as secretary for the purpose of the meeting.³

³ It can be helpful to designate a chairperson and secretary of the meeting. The chairperson basically makes sure that the meeting agenda is followed and keeps the discussion on track. The secretary is responsible for taking minutes and keeping them in the LLC book for reference should an issue or dispute arise.

The chairperson announced that the meeting was called by the members of the limited liability company and that a quorum was present.⁴

The minutes from the previous meeting were distributed. The complete LLC book was made available to inspect the articles of organization and any amendments, the operating agreement, the members’ capital contributions and percentage interest breakdown, all meeting minutes and a current print out of the articles of organization filed with the state agency, showing what the records currently look like in that state agency’s database. All members who were present read the previous meeting’s minutes and inspected any LLC records if they wanted to.⁵

⁴ If you include provisions in your operating agreement requiring an annual meeting, they should specify what a quorum is, or how many members need to be present for a vote to take place. A quorum will depend on the voting basis set forth in your operating agreement. For example, if voting is based on the percentage interest breakdown, a quorum will typically be member(s) representing a majority of the percentage interest in the company. If the voting is instead based on the number of members (i.e., one member, one vote), the quorum would be a majority of the number of members. Either way, requiring a quorum at the annual member meeting ensures that if there’s a vote on an issue that requires a “majority” (i.e., percentage interest or number of members), it can effectively take place.

⁵ It’s advisable to make the entire LLC book as described here available, as this shows the transparency of the company’s official status and records. In other words, it helps guarantee that no member is wrongly being subverted or pushed out and it shows to all the members that the LLC is up to date, so to speak. Including a statement about it in the minutes is good practice.

The annual financial report from the previous ending year was presented that stated the LLC had a net profit of $10,000. Upon a motion made and carried, the annual financial report was approved, attached to the minutes of the LLC.⁶

Ingrid made a motion and Margo seconded the motion to vote on the distribution of the net profit.⁷ Ingrid, Margo and Jema voted in favor of the motion, together carrying a majority in favor of a distribution as required by the operating agreement.⁸ It was decided that the net profit would be distributed in the following manner based on percentage interests:

Member name:	Distribution amount:
Marie Sister	$4,090
Jema Sister	$2,730
Ingrid Sister	$2,270
Margo Friend	$910

⁶ If any reports are presented at the meeting, be sure to attach them to the minutes. Again, this serves to track what information was presented in case a dispute arises. Reviewing the financial performance annually can be a helpful exercise. Doing this at an annual meeting ensures that all members have the opportunity to review it together, ask for clarifications as need, discuss any issues and suggest tips for financial improvement.

⁷ “Making a motion” and “seconding the motion” is a custom formality in corporate meetings. Surely you’ve seen it in the movies. Basically, any official action or vote that is to be taken at a meeting requires at least two people to agree. The first “moves” or “makes a motion” for the vote and the second person “seconds” the motion. Then the vote can take place. This helps assure that only relevant and significant matters go to a vote.

⁸ This is certainly a matter that may come up in the annual meeting, as the decision whether to distribute the year’s profits, if any, will come up annually. Here, Article 3.2 of the Sun Sisters Farm, LLC operating agreement requires approval by a majority of percentage interest before profits are distributed to members. Marie feels they should keep the money in the business, so she votes against it. However, Jema, Ingrid and Margo together have a majority of the percentage interest. So it’s decided the $10,000 profits are distributed among the four members based on the percentage interest breakdown.

The following people were named as the managers of the LLC for the next year:⁹

Ingrid Sister

Margo Friend

Upon motion made and carried by the members, the managers’ salaries were fixed at the following rates until another meeting:¹⁰

Ingrid Sister - $20,000

Margo Friend - $20,000

⁹ Another issue that can be addressed at the annual meeting is the appointment of managers. Here, Ingrid and Margo, who both were already serving as managers, were again named to continue in their posts. However, if for whatever reason there needed to be a switch in who served as manager(s), the annual meeting would be a great time and place to discuss and vote on the matter.

¹⁰ The salary of managers may go up or down each year. The annual meeting is a perfect place to discuss it, particularly because the financial matters were just reviewed by all members. Note that if the issue of raising or reducing salaries goes to vote, Ingrid may not vote on her own salary and Margo may not vote on her own salary. This would raise a conflict of interest and be highly suspect in the eyes of the IRS and the courts should an issue or dispute arise regarding financial matters of the company.

¹¹ If there is no further business discussed, the meeting can be adjourned. Again, customarily, this official action requires two people to agree by making a motion and seconding the motion.