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.

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 operating agreement. 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.)

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.

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.

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.

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.

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).

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.

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.

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.

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 it invested 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.

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.

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.

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.

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.

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., thevaluation 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.

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-today 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 managermanaged 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.

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.

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).

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.

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 10 members 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.