An Operating Agreement for a limited liability company is a contract between the owners of the organization. It is a user’s guide that defines their various rights of ownership, management, decision participation, and under what circumstances they may transfer their ownership interest in the organization. An operating agreement is optional, and authorized by the North Carolina Limited Liability Company Act (“the Act”).1
When an LLC is formed, rights of owners (called “members”) are governed by the Act until such time as all of the initial owners adopt an operating agreement.2 Normally, the initial owners agree to the terms of an operating agreement prior to forming the LLC, as protection of their contribution of property and supporting their decision to proceed. When an LLC interest is transferred to a new owner, the new owner must agree to the terms of the operating agreement. Given the restrictions the operating agreement places on ownership of an interest in the company, the new owner can decide to join or not. (For the mechanics of forming an LLC, see Limited Liability Companies: Steps in Formation.)
Generally, an operating agreement replaces most of the rights and responsibilities outlined in the Act, with a few exceptions. In other words, the founders of the LLC enjoy freedom of contract to define the rights associated with their entity up to the point where terms go against the public policy stated in the LLC Act, primarily the rights of interest owners to get information from the entity and to bring legal action against it.
This narrative features key clauses from a model operating agreement, and is typical for a family land limited liability company. It may serve as a model language for use in crafting an agreement. The selected sections herein are annotated with some explanatory language. Not every potential and creative use of such operating agreements is covered, and tax and boilerplate language has been omitted.
The Agreement Preamble and Purpose
The preamble is a simple statement of the intent of the organizers, and can contain a purpose clause. For an LLC that is organized to hold land enrolled in present use value property tax (PUV), it is critical to identify the purpose of the organization consistent with statutory “individual ownership” requirements of the PUV statute (see Present Use Value: Transferring Property Enrolled in Present Use Value Property Taxation).
Below is an example of such language:
This Operating Agreement of, [NAME] LLC (the “Company”), a limited liability company organized pursuant to the North Carolina Limited Liability Company Act, Chapter 57D of the North Carolina General Statutes (the “Act”), is executed by and among the undersigned Members who have agreed to be bound by this Agreement.
WHEREAS, the Company was organized as, LLC on APRIL 1, 2021 with [names] as founding Members; and
WHEREAS, the purpose of the Company is to manage, operate, improve and maintain certain farmlands in _________ COUNTY, NC; and
NOW, WHEREFORE, upon mutual agreement of the Members signing this agreement, representing 100% of the Membership Interest in the Company, hereby adopt this Operating Agreement (“2017 Operating Agreement”) set forth herein.
A purpose clause may also be added, as follows:
§ Purpose. The purpose of the Company is to operate a farm and manage farmland and to do any and all other acts and things which may be necessary, incidental or convenient to carry on the business of the Company as contemplated under this Agreement.
Restricting Who May Become an Member
One of the primary goals of many landowning families is to ensure that “the family farm” remains within ownership of the family’s lineal succession. To do so, the operating agreement must define who may become a member to achieve that purpose.
“Member” is defined by NC statute as “[a] person who has been admitted as a member of the LLC as provided in the operating agreement” or by mechanisms described in the Act.3 A member is distinguished from a person merely owning an “economic interest” in the LLC.4 An economic interest owner (non-member) only has the right of distributions declared by the LLC. Under an operating agreement, the member has the contractual (legal) right to participate in the affairs of the LLC (to the extent authorized by the operating agreement). Generally, only members have the benefit of participating in the “internal marketplace” created by the various options to purchase a departing member’s interest.
Because it is entirely possible that an ownership interest is transferred to the ownership of someone outside the intended set of permissible owners—and thus frustrate one of the goals of the entity formation—it is important to distinguish who may become a member. Such non-member interest owners may be distinguished and designated an “assignee.” Generally, non-qualified assignees retain their economic interest until such time as any operations to purchase their interest are exercised by the individual members or the company itself (all of the members collectively).
In the event a person not qualified to be a Member does become an owner, that person’s right of participation in the Company is limited to the receipt of income distributions (if declared by the management or other Members) or receipt of their share of the value of the company should it be dissolved. Consider this simplified example:
Brothers Thurston and Lee own Sonic Farms, LLC, each as members with a 50% interest. The LLC - which owns tracts of land devised to them by their fathers - has an operating agreement that restricts membership to lineal descendants of their father, and that only members may vote on LLC matters, such as how money is spent. Thurston dies, and his spouse Kim inherits his 50% interest in Sonic Farms, LLC. Because Kim is (obviously) not a lineal descendant of Thurston’s father, she is only an “assignee” of Thurston’s interest. As such she may receive income distributions when declared by the entity, for which Lee - as the only member - has sole discretion.
Note that Kim may remain an assignee indefinitely, unless otherwise admitted as a member per the terms of the operating agreement. Absent operating agreement to the contrary, admission of a member is a unanimous vote under the Act.5 Until such time as admittance as a member or buy out, the owner of an interest in the entity, she retains a right to receive information (e.g. financial statements) regarding the LLC and may bring litigation against the entity.
The Act identifies several events that automatically cause cessation of membership status, though that person retains their economic interest in the company. These events include becoming a debtor in bankruptcy, assigning an interest to creditors, consenting to receivership, and death or adjudicated incompetency.6 The operating agreement generally mirrors such triggering events, all of which normally trigger options to purchase as defined in the operating agreement.
As explored below, the transfer (testate or intestate) to Kim was a non-permitted transfer, which will trigger redemption options. Also note that a transfer by a member of their ownership interest to another person does not itself transfer the status of member to the transferee. The transferee interest owner must be admitted by the remaining members per the voting thresholds identified in the operating agreement. Example language might appear as follows:
§ Membership Defined. Any Member is an owner of a Company Interest who qualifies or has been admitted as a Member according to this Agreement. Any Member who is not identified as a Manager on Schedule II by this Agreement or who is not later appointed Manager pursuant to the terms of this Agreement does not have the power or authority to carry out the business of the Company nor to bind the Company. Members have the right to weigh in on decisions where allowed, according to the designated interest vote, by this Agreement.
§§ Who May Become a Member. The Members listed on Schedule I under this Agreement agree that Membership in the Company is restricted to the lineal descendants and those legally adopted by the lineal descendants of [insert names of patriarch and matriarch]
§§ Assignee Distinguished and Defined. An Assignee is a person or entity that has obtained a Company Interest in a transfer of that Company Interest not authorized by the Company or this Agreement. The Assignee of a Company Interest has no right to participate in the management of the business and no right to vote in the affairs of the Company or to become a Member. Any Company Interest held by an Assignee is not included in aggregate voting requirements or quorum dictated throughout this Agreement. The Assignee is only entitled to receive the distributions and return of capital, and to be allocated the net profits and net losses attributable to his or her Company Interest under §§.
§§ Admission of Members. Any person (including an Assignee) may become a Member pursuant to this Agreement unless such person lacks capacity or is otherwise prohibited from being admitted by applicable law.
§§ Admission of Assignee as New Member. An Assignee of a Company Interest may be admitted as a New Member and admitted to all the rights of the Member who initially assigned the Company Interest only if the other Members consent by a Two-Thirds (66%) vote of Company Interest held by Members. If so admitted, the New Member has all the rights and powers and is subject to all the restrictions and liabilities of the Member originally assigning the Company Interest.
Management and Member Participation in Company Business
The operating agreement may restrict membership participation in business decisions of the business, whether to buy or sell assets held by the company, how to invest earnings of the company, whether to admit new members, and whether to distribute income earned by the company. The Act creates a position in the LLC known as the “Manager” who is empowered by the LLC and the operating agreement to manage the affairs of the business. One primary purpose of the operating agreement to limit the powers of the Manager(s), and to define when non-manager members may step in and vote to approve or disapprove certain proposed transactions.
When certain decisions are defined as requiring approval by the members, the operating agreement may take the approach of voting by the head (one member, one vote) on decisions, or by adding weight to the amount of company interest held by the voting member. As such, the operating agreement will use language indicating that the vote tally is made by the percentage weight of the company interests required to vote on the matter at hand. Such majorities can be in whatever percentage the would-be members decide in ratifying the operating agreement. For example a simple “majority in interest” (50.01%), a “two-thirds majority in interest” (66.67%) or “three-fourths majority in interest” (75.01%). (Because unanimous votes could lead to deadlock, this requirement—even for sale of the family land—is not recommended; those who want ownership of the land may have a general right of refusal on such property granted by the operating agreement.) Note that the operating agreement may in some detail prescribe a process for how meetings of members are called and managed, such as when a quorum is present to validate company decisions. Following is a language example:
§§ Certain Powers of Manager(s). The Managers have the power and authority to act on behalf of the Company - without approval of the Members - to:
a) Enter into, make and perform contracts, agreements and other undertakings binding the Company that may be necessary, appropriate or advisable in furtherance of the purposes of the Company, including, except as limited by this Agreement.
b) Open and maintain bank accounts, investment accounts and other arrangements, drawing checks and other orders for the payment of money, and designating individuals with authority to sign or give instructions with respect to those accounts and arrangements.
c) Collect funds due to the Company.
d) Perform, or cause to be performed, all of the Company’s obligations under any agreement to which the Company is bound.
e) With the consent of a Two-Thirds (66%) vote of Company Interest held by Members for transactions in excess of $100,000 and without consent of the Members for transactions below such amount, borrow money for the Company from banks, other lending institutions, or Members on such terms as the Manager deems appropriate, and in connection therewith, to hypothecate, encumber, mortgage and grant security interests in the assets of the Company to secure repayment of the borrowed amount.
f) Purchase liability and other insurance to protect the Company’s property and business.
g) Hold and own any Company personal properties in the name of the Company.
h) Execute on behalf of the Company all instruments and documents, including, without limitation, checks; drafts; notes and other negotiable instruments; deeds, mortgages or deeds of trust; security agreements; financing statements; documents providing for the acquisition, mortgage or disposition of the Company’s assets; options, contracts for sell or purchase; leases; and any other instruments or documents necessary, in the opinion of the Manager, to the business of the Company, all subject to such Member approval, if any, as may be required herein.
i) Employ accountants, legal counsel, managing agents, or other experts to perform services for the Company and to compensate them from Company funds.
j) Negotiate and execute long-term contracts, including leases up to ten (10) years.
k) Sell real and personal property owned by the Company, except sales of substantially all of the Company’s property in a single transaction or plan of sale.
l) Perform all other acts as may be necessary or appropriate to the conduct of the Company’s business.
§§ Limitations On Powers Of Manager(s). Notwithstanding anything herein to the contrary the Managers will not take any of the following actions, unless approved by a Two-Thirds (66%) vote of Company Interest held by Members:
a) Merger or consolidation of the Company with or into another entity;
b) Dissolution of the Company;
c) Material change in the Company’s business;
d) The assignment of Company property in trust for creditors or on an Assignee’s promise to pay the Company’s debts;
e) The confession of a judgment;
f) Incurrence of debt by the Company other than with respect to accounts payable incurred in the ordinary course of business;
g) The submission of a Company claim or liability to arbitration or mediation;
h) Purchase of any real property;
i) Loan monies or funds of the Company to any other Person, or guarantee the obligations, of any other Person;
j) Sell or otherwise dispose of all or substantially all of the property of the Company as part of a single transaction or plan of sale so long as such disposition is not in violation of or a cause of a default under any other agreement to which the Company may be bound.
Reduction of Company Interest to “Units”
Unlike corporations—of which ownership is based on shares of issued stock—limited liability company ownership is measured by a simple fraction of 100. For example, while a corporation may be authorized to issue 1000 shares, it might issue only 100, representing 100% ownership in the corporation. An LLC is not required by law to issue “shares,” and all interests—whether by member or assignee—add up to 100%. However, breaking that 100% into a discernible unit analogous to a share of stock can be very handy for transfer of interests in the LLC between members, or to new members authorized as such by the operating agreement.
The number of units is arbitrary, a figure chosen by the drafters of the operating agreement to represent 100% ownership interest. For example, an LLC organized by three people making initial contributions of equal value likely results in each owning one-third (33.33%) interest. The operating agreement might declare that total value (and ownership) of the LLC is measured by 3000 units (each founder receiving 1000). Ownership is now broken into a discernible (yet intangible) “thing” that can be easily valued, and otherwise easily transferred.
The unit may be valued for transfer, either by gift or sale, and can be accompanied by a unit certificate to transfer. At the time of transfer, the management of the company can set the value of the company based on the current fair market value of its assets (e.g. land). For example, assume land owned by an LLC with 3000 units (representing 100% company ownership) has a fair market value of $500,000. Dividing 500,000 by 3000 results in a unit value of $166.67.
Such reduction to unit value is particularly useful in gift tax planning, whereby a transferor (e.g. a parent) wishes to make a transfer of their economic interest to a certain transferee who will qualify as a member (i.e. child or other successor). Recall that the annual gift tax exclusion (in 2021) is $15,000, and any amount gifted to a donee within a calendar year below that amount need not be declared on a gift tax return. Here is an example of how that might work, using the math above:
Jerry owns 1000 units (a one-third interest) in Sugar Magnolia Land Co., LLC. He wishes to make a transfer to his daughter who qualifies as a permitted transferee under the operating agreement. Because the company has recently appraised its landholdings at $500,000, he knows that each unit is valued at $166.67 (500,000 / 3000). Knowing that his annual gift tax exclusion is $15,000, he simply divides 15,000 by 166.67, resulting in 89 units which he can transfer to his daughter. Because his daughter is a “permitted transferee” as defined by the operating agreement, she may become a member upon signing the operating agreement to become bound by its terms.
Continuing this thread, an owner with a more aggressive gifting program might set an appraisal value at the end of the year and do a double transaction, with one $15,000 gift (of 89 units supported by paperwork) made on December 31, and a second gift of 89 units made on January 1. Further, tax law allows a non-interest owner spouse of the transferor allocate their annual exclusion to their spouse’s gift to that donee, doubling the gift. In this example, a transferring member may make a gift of 4 x 89 units in a short period of time. (See the examples of such paperwork following this narrative.)
Transfer of Company Interests
As noted above, the LLC as operating or landholding entity makes transfers of ownership in assets relatively straightforward. Because one of the likely goals of the organizers of the entity is to control who may become an owner, the operating agreement must define the rights of anyone coming into ownership of an interest in the entity. We refer to this as a restriction on transfer. Because interests in an LLC are personal property, transfers are an internal affair requiring no public recording (i.e. with the county register of deeds) even though the entity may own land.
The operating agreement cannot restrict an owner (member or assignee) from transferring their interest in the company, and such right is protected by statute.7 In other words, the transferred interest does not become forfeit to the company; rather, the operating agreement may declare certain transfers invalid ab initio, particularly those that may violate securities law. However, per the operating agreement, certain transfers trigger certain buy-back provisions, whereby the company interest is converted to cash to the holder following terms and process outlined in the operating agreement.
The operating agreement may describe certain transfers that do not trigger the operating agreement’s purchase options. These are known as “permitted transfers.” Any transfer that is not a permitted transfer will trigger the purchase options outlined in the operating agreement (these are explored further below). Following is such language:
§§ Transferability of Membership. Membership cannot be transferred except by compliance with this Agreement. A Member may transfer his or her Company Interest (i.e. Units) only after compliance with Article X. Any transferee of a Company Interest by any means will have only the rights, powers and privileges of an Assignee as defined in §§ or otherwise provided by law and may not become a Member of the Company except as provided in Article Y.
§§ General Restrictions on Transfer. The term “transfer” when used in this Agreement with respect to a Unit or Company Interest includes a sale, assignment, gift, pledge, exchange, or other disposition. Except as specifically provided in this Agreement, no Interest Holder at any time may voluntarily transfer any of its Company Interest to any person or entity other than a permitted transferee under the terms prescribed herein.
§§ Permitted Transfers. For purposes of this Agreement, a “permitted transfer” means a transfer that will not trigger the Company right of redemption or member purchase options set forth in §§. Each of the following transfers will be deemed to be a “Permitted Transfer” of Company Interests:
a) Any transfer by any Member to any other Member, or to a person eligible to be a Member described in §§. (Note: a descendant of the identified ancestor)
b) Any transfer by any Member to an individual approved as a New Member under Article ___.
c) Any Person who is a shareholder, partner, member, or beneficiary of any Entity that is already a Member or that formerly was a Member;
d) Any trust or trusts for the sole benefit of Persons described in items §(a) through §(c) above so long as said Member is living;
e) A general guardian, a guardian of the estate, or a custodian for any Person described in items §(a) through §(d) above, under the guardianship law or the Uniform Transfers to Minors Act in any jurisdiction where such a Person may be domiciled.
Options to Purchase Interest of Departing Member or Assignees
An option agreement—also called a buy-sell agreement—provides continuity of management and ownership in the LLC. The buy-sell language of an operating agreement is a contract creating an option whereby one member may elect to buy all or a portion of the business (which includes its assets) upon the retirement, death, divorce, or disability of another member. Such options are also triggered when a member transfers an interest in the company to a person not otherwise qualified by the operating agreement to be a member.
The option language specifies who can buy the ownership interest, what circumstances trigger a purchase option, and how the purchase price will be set and paid, and at what interest rate. Terms of the sale and when the sale will occur are also included. Funding of the purchase can be an important consideration in drafting an agreement, and is usually accomplished with business cash flow, loans, life insurance proceeds, or through the sale of other assets.
A buy-sell agreement allows the LLC members to agree ahead of time how to later establish the value of the company and the value of ownership interests in a mutually beneficial agreement for all owners. Such agreement helps to reduce uncertainty about what happens in the event tragedy befalls an owner, or when an owner decides to leave the business. The agreement minimizes disruptions to the business operations after an owner’s exit because the general circumstances of the exit have been contemplated ahead of time by all parties in interest. Planning for the future of a farm or forest landholding in this way assures the entity’s ownership remains with those intended (i.e. family members). For an operating entity (i.e. a farm operation), it can provide investment-decision stability for the founding owner should he or she grant equity (ownership) to others, including key employees.
If the entity owns land, the inclusion of an option agreement manages the risk that others—such as non- lineal family members—may gain an ownership interest and have different ideas about the use or disposition (ie. sale) of the land. In this form it is sometimes used to allow other heirs to participate in the equity of the land without ultimate control over disposition.
A common form of option agreement in an LLC operating agreement can work this way: one owner suffers a triggering event, such as death, a disability, files for bankruptcy, or a desire to leave the business, thus exposing ownership of his or her interest to third parties not chosen by the remaining owners. The agreement requires him or her (or his or her representative) to notify the other members in a specified manner, which starts a clock on a series of options. The business itself may have the first option to purchase the business interests of the departing member (called “redemption”). To exercise this first option, the remaining owners of the business vote under their procedure for making such decisions, binding the company to the purchase; the purchased equity is often then allocated among the remaining members. If the company passes on the (usually time-limited) first option, or a vote for company purchase fails, then a second option becomes available whereby individual owners may exercise the option and purchase the interest with their own money. They absorb the interest purchased, and their share of the company grows. It is probably advisable to keep the option open as against assignees, who, unable to participate in the decisions of the entity affecting their economic interest, may press a legal challenge to the managers.
In anticipation of the possible death of an interest owner, the company may have purchased a life insurance policy on that owner, and the governing agreement may require that the company purchase the interest. Without such funds, purchases are usually seller-financed, calling for a deposit and schedule of payments with interest.
An option holder in an entity normally has no right to force another member to give up their interest absent a triggering event, only the right to be the first in line to buy the interest. As noted above, because the option holder cannot guarantee that the business interest will be put up for sale at a time where the option holder is able to cash flow the sale, the terms of valuation and purchase are usually set forth in the option agreement favorable enough to allow a purchase over time, essentially requiring the departing owner to seller-finance the purchase.
In most option agreements, the ownership interest becomes the property of the purchaser upon exercise of the option according to its terms, such as making a down payment and executing a promissory note, the terms of which are defined in the operating agreement. Following is an example of departure language:
§ Voluntary Member Departure
§§ Departure Notice. When a Member decides to voluntarily withdraw from the Company (i.e. wishes to dispose of his Company Interest), the Departing Interest Holder shall promptly give notice (the “Departure Notice”) to the other Members and to the Company.
§§ Company Option of Redemption. Following delivery of the Departure Notice, the Company, by a Majority (>50%) vote of Company Interest held by the MANAGERS, may redeem all or any part of the Departing Interest for the purchase price and upon the other terms and conditions specified §§ and §§. To exercise this option, the Company must give notice to the Departing Interest Holder, stating the Company desires to exercise the right of redemption, not later than sixty days (60) days after receiving the Departure Notice. The Company shall deliver a copy of notice exercising redemption to the Departing Interest Holder, as well as the offered price for the purchase as determined by §§. Upon purchase the Company shall distribute the redeemed Departing Interest pro-rata among the remaining Members (Assignees may not receive any further distribution of Company Interest above any Company Interest previously assigned).
§§ Members’ Option to Purchase. If the Company does not exercise the first option or exercises the option as to only a portion of the Departing Interest, all Members have a second right of refusal to purchase all or any portion of the balance of the Departing Interest Holder’s Company Interest for the purchase price and upon the other terms and conditions specified in this Agreement. To exercise this second option, a Member must give notice to the Departing Interest Holder, stating such Member exercises the second option, not later than sixty (60) days after the termination or expiration of the preceding offer. Each Member who exercises the second option shall deliver a copy of his notice exercising the second option to the other Members. If more than one Member has exercised their second option, the Departing Interest must be allocated equally among the Members having duly exercised this second option. However, the Members exercising this second option can agree on another arrangement.
§ Involuntary Transfer by Member or Assignee
§§ Notice Upon Trigger Event. If the Member is declared to be bankrupt or insolvent by any court of competent jurisdiction, or makes an assignment for the benefit of his creditors, or has any of his Company Interest attached or levied upon for payment of his debts, or is required to transfer any Company Interest by any order, judgment, or decree of any court or other adjudicatory body for any reason, whether or not related to the Member’s or Assignee’s financial condition (including but not limited to an action for divorce) (a “Triggering Event”), such Member or his or her successor in interest, as the case may be, shall give notice to the Manager(s)s of the Company. The notice must identify the Company Interest subject to transfer as a result of the Triggering Event (the “Offered Interest”).
§§ Options to Purchase. Upon such notice, the Company and Managers then have the option to purchase the Offered Interest. The “Seller” is deemed to be the “Insolvent Interest Holder” (the Member) or his or her lawful representative and successors in interest.
Valuation of Departing Interests
When a purchase option is exercised, the owners of interest subject to the option (the seller) and the person exercising the option (the buyer) will have to agree on a price and payment terms. Often, the buyer and seller may simply come to an agreement on the terms of purchase. However, disputes may arise over the true value (buyer will want a lower price, seller will want a higher price), so a method for objective appraisal should be put in place before the event causing exercise of the option. After the event, it is too late.
Determination of fair market value of a company is a task that may be undertaken annually as a matter of company business. In that event, those charged with making binding decisions for the company will have set the price to be used when an interest is to be purchased under an option agreement. In the event a fair market value has not been set at least within a time near to the purchase event, there must be a process.
In addition to a process for valuation, because many companies are closely held—often between family members—a discount on the value is applied prior to purchase. Because it is important to restrict transfer of interest in the company, the company interest subject to the option may not be sold on the open market, and must suffer a reduction in value. The discount figure is agreed between those accepting the contract that governs company business between owners.
Should a dispute arise, the value is set by an objective appraiser. The option agreement will normally assign who chooses the first appraiser and pays their expenses (normally the seller or company.) If the party on the other side of the purchase (i.e. the buyer) believes the first appraisal has overvalued the company interest to be purchased, he may commission a second appraisal. The company agreement may then call on the two appraisers to reconcile their figure, and if they cannot, a third appraiser is chosen.
As a practical matter, in small company situations, the expense of fully pursuing appraisal valuation may be an incentive for compromise. However, in the event both buyer and seller cannot agree to a valuation and price, a legally defensible method must be available to the parties.
The language below illustrates the process for valuation of a company interest subject to a buy-sell option to purchase:
§ Purchase Price Transferred Interest (Determination of Fair Market Value). The fair market value for any Company Interest purchased under Voluntary Transfer, Involuntary Transfer, Disability, Death will be the most recent annual value determined by the Managers under [previous section number]. For any such transfer, the purchase price is: 1) the fair market value, 2) divided by the total number of units, 3) then multiplied by the number of units to be redeemed. All units subject to redemption are applied a fifteen percent (15%) discount in value.
§§ Fair Market Value. Fair Market Value is that value annually determined by the Managers pursuant to [previous section number].
§§ Use of Appraiser. In the event the Managers have failed to determine an annual fair market value within thirty-six (36) months prior to the notice of the proposed transfer of a Company Interest, the Managers shall set the fair market value of company interests by use of an appraisal of the assets, with the Departing Interest Holder naming the appraiser, which in the case of an estate is the appraiser of the estate. The Departing Interest Holder shall pay the appraiser’s expenses.
a) Challenge of Appraisal. If the purchaser of the Company Interest (i.e. the Company) (“Buyer”) should question the value as determined by the Departing Interest Holder’s appraiser, he or she may select and pay the expenses of a second appraiser. The two appraisers shall proceed to determine a fair market value. Their valuation shall be final and binding on all parties.
b) Resolution of Different Appraisals. If the two appraisers cannot agree on a fair market value, the two appraisers shall select a third appraiser. If the third appraiser’s value is outside of the range of the first two appraisers, the value of the first two that is closest to the third shall be used. If the third appraiser’s value is within the range of the first two appraisers, the third appraiser’s value shall be used. This determination shall be final and binding on all parties. The Departing Interest Holder and purchaser(s) shall each pay half of the expenses of the third appraiser.
c) No Consideration of Insurance Proceeds. In determining the fair market value of Company Interest, no consideration may be given to the proceeds or value of any life insurance owned by the Company on the life of any Interest Holder, except to the extent of its cash surrender value.
d) Payment of Appraiser Fees. All fees and expenses of any appraisers retained in connection with any determination of fair market value under this § must be borne fifty percent (50%) by the Departing Interest Holder and fifty percent (50%) by the Buyer, except that the two fees of the two appraisers who are appointed individually by the Departing Interest Holder and the Buyer shall be paid individually by the party appointing that appraiser.
Dissolution and Distribution of Assets
Though entity life is indefinite as long as it is maintained, an LLC operating agreement should address termination of the entity. The Act provides a process for dissolution and winding up the affairs of the entity, including publication to alert unknown creditors of their window to present claims against the entity (much like an estate).8 The operating agreement may take matters further in directing distribution of assets to the members.
With an LLC that was organized to hold family land, the initial members drafting the operating agreement may wish to include a right of purchase (at fair market value) any land to be distributed (the terms mirroring those regarding valuation in the buy-sell section).
Dispute Resolution and Mediation
Finally, in order to foster agreement to resolve disputes, the operating agreement should require that all disputes must first be submitted to voluntary mediation before commencing any litigation to enforce the terms of the agreement. Given the cost of litigation, all parties may be better served to put their dispute in the hands of a mediator prior to filing a complaint with the court, which will only order mediation anyway. Lawyers may certainly disagree on this point: intransigent members may not voluntarily participate in mediation, and must be forced to do so by the real legal pressure of a served complaint.
An operating agreement addresses numerous issues, and—as a contract between parties—can express the creativity of the members in their bargain with one another over the management and terms of their company. The issues discussed in this narrative try to express the heart of the LLC’s utility in serving the property protection interests of those who co-own interests in land.
2 N.C.G.S. § 57D-1-03(21) appears to tie term “member” to the existence of an operating agreement, though the initial owners can take the title of member by identifying themselves as a such in the Articles of Organization (see N.C.G.S. §57D-1-20(b)(2).↵
Publication date: March 24, 2022
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