Alberty Publishing Online: Item Detail

Price: $50.00
Revised: October 1, 2009 - 33 pages

Description:
Increasing numbers of businesses are choosing to operate as limited liability companies taxed as S corporations. This form of organization, which involves an entity organized as an LLC under state law that makes an election to be treated as an S corporation for tax purposes, takes advantage of the best of both types of entity.

An LLC possesses a flexible management structure, allowing it to be operated like a partnership and avoiding required corporate formalities. An S corporation, on the other hand, enjoys favorable employment tax treatment. The shareholders of the corporation are not subject to employment taxes on corporate income except to the extent it is distributed to them as salaries or other compensation. Income distributed as dividends or accumulated for capital needs is not subject to employment taxes. In comparison, members of an LLC taxed as a partnership must pay self-employment tax on their shares of the LLC’s income in the year it is earned, whether or not any of it is distributed.

The Internal Revenue Code requires an entity taxed as an S corporation to meet certain requirements. If they are not met, the entity cannot make an S corporation election, and if they cease to be met, the entity’s S corporation election is terminated. Standard LLC operating agreements lack the provisions necessary to address these requirements. Form 3.4 is a form of operating agreement specifically designed for LLCs that elect to be taxed as S corporations.

Features:

Buy-sell provisions, cross purchase - Operating agreement gives the other members the right to purchase the ownership interest of a member who has dissociated or intends to transfer the interest. However, the LLC has the first right to purchase in these situations.
Buy-sell provisions, purchase price - Under this operating agreement, the purchase price of a member's interest is determined by agreement or appraisal by a single appraiser.
Buy-sell provisions, redemption - Operating agreement allows the LLC to purchase a member's interest following dissociation and also gives the LLC a right of first refusal to purchase a transferring member's interest.
Buy-sell provisions, terms - If a member's interest is purchased under the buy-sell provisions of this operating agreement, the purchase price of a member's interest is payable in monthly installments over five years, and the obligation to pay the purchase price is secured by ownership interests.
Buy-sell provisions, transfer restrictions - Operating agreement prohibits transfer of a member's interest if it would result in the termination of the LLC's S corporation election.
Dissociation - The dissociation of a member causes the LLC to dissolve under this operating agreement unless the company or other members purchase the dissociated member's interest.
Dissolution - Operating agreement provides that LLC is dissolved by unanimous agreement of the members or by the dissociation of a member and a failure of the LLC and other members to purchase the dissociating member's interest.
Distributions, allocation - Under the terms of this operating agreement, all distributions must be made to members in proportion to their ownership interests.
Distributions, required - Operating agreement requires annual distributions to be made in amounts sufficient to enable members to pay taxes on LLC income that must be reported on their individual returns.
Management - Operating agreement for member managed LLC.
Members, compensation - Operating agreement provides that members may be paid salaries, which are to be fixed by the members.
Members, ownership interests - The members' ownership interests, which are called ownership shares under this operating agreement, are proportionate to their capital contributions.
Members, voting rights - Operating agreement provides that members are entitled to vote in proportion to their ownership interests.
Operating agreement - Operating agreement for member managed LLC.
Outside activities - Members are permitted to engage in business activities outside the LLC under this operating agreement, but not activities that compete with the LLC.
Profits and losses - Operating agreement provides that profits and losses of the LLC are allocated between members in proportion to their respective capital contributions.
S corporation election - Operating agreement prohibits any action by the LLC or its members that would revoke or terminate the LLC's S corporation election unless a supermajority of the members consent. The agreement also requires members to take certain actions necessary to reverse the consequences of an inadvertent termination.
Securities law - Operating agreement contemplates that interests of members are securities for federal and state securities law purposes.
Term - Operating agreement provides for continuation of the LLC until it is terminated in accordance with the operating agreement.
Transfer restrictions, right of first refusal - Operating agreement provides that unless the other members consent to the transfer of a member's interest, the LLC has a right of first refusal to acquire the interest to be transferred, and the other members have a right to purchase the interest if the LLC does not do so.
Withdrawal - Operating agreement allows members to withdraw at any time with at least 90 days notice.

FORM 3.4 — Operating Agreement for LLC Taxed as an S Corp.