IC2 – Operating Agreement Video 2

0:00
OK, thanks for joining.
0:00
This is Part two, where I'm talking about the operating agreement, and how to add a provision in the operating agreement when you want to bring in a partner.
0:08
So, I want to explain that.
0:09
It's not necessarily a partner.
0:11
It could be another member. You can say it however you want. You can describe it however you want.
0:15
But what I want to explain is that you have the right to contract, you have an interest in property, the member shares of the LLC, and you've expressed them in some way, OK, Whether it's through a trust or organization or something like that.
0:30
So what we can do is, we can bring in another interested party, and that party can purchase some of our shares with what's known as a contribution.
0:39
But what's really important here is that even though we can write the terms of something like this, where we're going to take on a new member to further the business or maybe there's a new investor, OK, I'm not talking about a lender that's a little bit different. So we're just talking about someone joining and taking a membership interest. Excuse me.
0:56
So what you do is the agreement.
1:00
So if parties operate a certain way, that's the agreement.
1:04
We try to express that relationship in writing, because that preserves what's happening, because sometimes the way people are is we get into some business relationship, for example, and then that changes over time, and then maybe it becomes prejudicial to the parties that are that began the agreement. And so if we have something in writing, we can always go back and refer to it and hold each other accountable under the original terms of our arrangement. And then we can always amend those terms. But at least we have something, a written record of what those terms were.
1:33
And so we don't just let things evolve over time, OK, because interests change, OK.
1:39
So this is a good idea to have what's called an Admission Agreement.
1:44
So we're going to express the terms and conditions of when we're going to add someone, and give them a membership or sell them an interest in the organization, I'm mostly talking about an LLC, So what I have here is an example of this type of Agreement, and so you would like if it's your company, and you're gonna add a member, and maybe the member is going to come in with some cash.
2:03
OK, so, we're gonna put your company name here, and this is what we're going to do.
2:07
We're going to describe what's going on, we're going to explain what's being contributed. Now, sometimes it's not cash. Sometimes it's equipment or the use of a facility.
2:16
Property, real estate, things like that. But what we want to do is express what that is. What is the contribution for this new member?
2:23
Now, remember, keep in mind that what you do is the contract and we're trying to, as accurately as possible, represent what you're doing in this series of words. I call it this, this written agreement. I'll give an example.
2:37
If, if I borrow money from somebody, no, that's not taxable, Let's just talk about that. Because most of you are concerned about that.
2:45
So it's a good example, so if I borrow money and then the deal is, I'm supposed to pay back over, let's say, five years, monthly, and let's say I don't, let's say I don't do any of it, let's say don't pay anything, and then whoever lent me the money just says Africa it.
2:59
Yeah, so I can't likely tell the IRS that I borrowed money, and therefore it wasn't taxable, because even though we may have said I borrowed money, in fact, we may even have a loan agreement that's in writing.
3:11
But what I actually did was I received money, and then I never returned it. So I actually used the money in a way that did not represent a loan agreement.
3:19
It represented a payment, A gift.
3:23
I don't know what you want to call it but, The IRS has an accounting method for this and they call this, imputed income or tax liability, resulting from an imputed income type transaction, Or, for example, I borrowed money.
3:35
Didn't pay it back, or I didn't pay all of it back, or I paid it back under different terms, and under Novation a new contract and I didn't fulfill that contract.
3:44
So, it would consider the money I did not repay under the loan terms as imputed income, meaning that it's taxable, that's probably the most common example.
3:55
So what you want to do is, you know, keep in mind, that the way you operate, the way you react, inner inner, interact with other people.
4:02
New members should be reflected in this contract.
4:04
So there's a couple things in this contract, though, that, know, they're, like, people, warranty, making a warranty to each other about their competence and they're good standing, and things like that, somebody get touched.
4:15
And so there's some basic provisions.
4:16
So this is a very basic version of an admission agreement for an LLC. So the first thing we wanted to do was identify the parties.
4:22
Then we want to talk about what's being contributed here.
4:25
What's going to be given in exchange?
4:27
There's going to be membership interest.
4:28
So, for example, if I'm the 100% owner of an LLC, and I sell a percent interest to somebody, let's call him an investor, but he's going to be my partner now because he's putting out some cash. And let's say I did evaluation.
4:39
So, we use an objective standard to evaluate how much the company's worth.
4:43
So, we look at a balance sheet on the company and say, OK, the company's worth a million dollars based on receivables based on whatever things they could sell and whatever standard evaluation measures we're using.
4:55
So, based on that number, however many shares, I decided to claim that there is, if I, if it's a million dollars, and I want, a million shares, will then each shares worth a dollar, right?
5:04
So, if somebody comes in with 10%, Excuse me, he's gonna put in $100,000, OK, he's gonna get 100,000 shares, and so, we put this in the agreement, The membership interests, they may call this Units, you'll see it in here, OK?
5:20
So, the initial contribution is, let's say this cache, OK?
5:23
There's dollars, and then, he can.
5:26
He has so much time to contribute it, The new partner, all right, and to represent this, or the receipt for the risk for this money, this contribution is going to be represented by units or, you know, some language that's going to document. what happened.
5:39
Now, keep in mind, if I don't have it, a formal document like this.
5:43
The fact that money was wired from a person, who's now a member from his bank account, is the is it the membership units?
5:52
It represents how much money and the fact that I have a dated valuation of the company determines how many units that contribution is worth.
6:03
So, even if I don't say how many units it's worth, the fact is, there's a record of the contribution, and we can, we can go back and find it.
6:12
So if I don't have a written agreement, which is kinda sloppy, I really should have one.
6:16
If I don't, I can still establish what the terms were.
6:19
OK, based on what I actually did.
6:21
So, here, we're just saying, Hey, here's what is being contributed.
6:26
Here's what's being used as a receipt, for example, or a show, but here's what the person is getting.
6:31
And then we're going to call that a percent interest, and, like I just said.
6:36
I don't have to say that in here.
6:37
The fact is it can be calculated later if there's ever a dispute, but let's just be clean about this.
6:42
Let's be neat about this and tidy everything up, and let's just say that here's the percent right now.
6:47
And so what we're going to say is, we're going to tell the purchaser, hey, look, we're in good standing this companies in good standing, there's nothing weird going on.
6:54
We're not dealing, drugs were all the money we're receiving as legally received, and we're gonna warranty that to you.
7:01
And then you're going to express to us that you are capable and competent of understanding what you're getting into here.
7:09
It's not so simple, as, I'm of legal age.
7:12
Therefore I could sign, it's more about, I'm gonna buy an interest in a company now, and that's different than grocery shopping.
7:18
And so, I'm gonna make a special representation here, that, you know, I'm confident I've done this before, and things like this.
7:24
I understand, or I've had a chance to confer with another party, like an advocate, an attorney or some professional to advise me, and the person I'm contracting with, of as my company, and I'm bringing in somebody else.
7:36
He's not going to confer with me.
7:38
He's got to confirm with someone else, because maybe we have a competing interests.
7:41
We're not supposed to, but I'm just saying, you know, at the beginning of the deal, that hurt the purchaser.
7:47
The new member should represent that he's had a chance to consider everything that he's competent.
7:53
And that, uh, he's, he's confronted with somebody if he or had the opportunity to do that, Carefully, review's understands, understands the risk and all these things, now it's nice to have all these things in here And really, if you're going to be out in the world, investing in things, and taking a private equity interest in things, you should already be able to have this, these qualifications, you, you, yourself, should know. Just like.
8:17
If you don't know how to drive a car, you shouldn't be driving a car, right, and you should go get some training, or at least get someone to drive you around. So this is the same kind of deal.
8:27
Yeah, so, that last paragraph here, I thought was interesting, You're gonna, you're gonna warrant that you're not relying on a sales pitch, essentially, to make a purchase, that you've actually read the Operating Agreement, and this is where it starts, OK. You need an Operating Agreement if you want to raise capital or bring a partner in. And if you don't have an Operating Agreement, that's OK.
8:44
The new partner and you can possibly write one app, or you can write one up and bring in the new partner, and modify the operating agreement.
8:50
So, you can always bring in an Operating Agreement, you can always abandon one and change it.
8:54
So, don't think it's the end of the world, if you don't have one.
8:57
Just the same.
8:58
I mean, they can always be amended.
9:01
But you have to go from an offering agreement.
9:03
There has to be the authority allowing the company to add in new members, to admit new members, that's pretty easy to do.
9:10
So, and then we're going to say representations of the company, and they get into things like, Yeah, we're in good standing, everything's cool. We're not monitoring money.
9:17
No, we're not have competing, so we don't have subsidiaries or we're not competing with maybe something you have an interest in.
9:24
Yeah.
9:24
We're authorized to do it because the operating agreement says so, and then they get into things like, we don't have any.
9:30
We're not don't have any outstanding activities that require licensing or permitting, everything's good. You know, we're doing exactly what we're allowed to do.
9:38
There's no important litigation that's pending that would, you know, maybe cause the company go into bankruptcy after we got your money, you know things like that.
9:45
So we'll also have a little SEC disclosure in here.
9:50
Let me jump down here real quick.
9:52
So, what basically, we want to say is, when you buy into this, you are doing it so that you have an interest in the company and you're, you're going to maintain your interest in the company.
10:01
The way it was when you first bought in and we don't want you to sell your interest or Hypothecated or collateralize it anywhere.
10:09
For example, if you, If you come in with my company and it's worth a million dollars and you put in a half million dollars, you make yourself a 50% partner.
10:16
I don't want you to turn around the next day and go Make a deal with the mafia to do something.
10:21
You know, your interest in my company or, Sell a half of your half of my company to the mafia.
10:27
I don't want to deal with, you know, the criminal syndicate and things like that. And I don't have to.
10:31
Likewise, I don't want you to think that you can come in and buy part of the company and then sell shares of your interests somewhere else, you know, and violate SEC laws and then dragged me into that illegal activity. So you're going to warrant to me in the contract here that you're not going to do that, and that's not your intent.
10:48
Because when you do that, then I have a defense, because then I could claim that you misrepresented what your interests were.
10:54
So you see how this is somewhat important to document things going forward. I've never seen this situation, by the way. But, you know, this is, this is a pragmatic thing to do.
11:03
Transfer restrictions, as Raj is talking about, securities laws, and then you know, this is written by an attorney probably.
11:09
And they go into all the details here that big of a deal. So then we come down here. And all the notice is, here's how we're going to handle that.
11:16
I don't like to waive notice requirements. I like to make notice requirements. I make the like to make them form. I think that's important.
11:22
And then, we come here, and.
11:26
the bottom line terms here, and then we'd talk about taxpayer information.
11:29
That's not, Well, as, it's just standard stuff. We don't need to put that. I mean, that's not really important.
11:34
What's important is that the other person, you know, is It's operating with full disclosure, and so are you, and everyone's clear as to what they're getting into, and Rehabbed has reasonable expectations. Now, what is not included in this particular example?
11:50
Review my notes here.
11:52
Um, OK, so one of the things to consider is I know it's probably mentioned in here, but based on the percent interest that was purchased.
12:01
That may convey certain voting rights. So, if I have a 50% ownership and you have 50% ownership, we have 50, 50 voting rights.
12:09
Some things in the operating agreement should require yannick unanimous voting or, you know, if it doesn't mean, you'll have two people to interested parties.
12:18
And there's like, you know, and you have to, you have to have a prevailing vote to approve something.
12:23
You're gonna have a difficult time, So, no, I don't know how you resolve that.
12:28
Until you basically have to negotiate that every time if there's just two people, and lots of time, just, that's what it is.
12:33
There's two people, but, so, the amount of contribution may have a lot to do with the percent voting, right?
12:37
There's nothing wrong with, if I own 66%, and you and 33%, that I have two votes tier one, so that makes me the boss, right?
12:45
So, there could be something like that.
12:46
I know you've seen in the movies where one guy's 51%, and, you know, he runs the world and stuff, So he could do like that.
12:53
Um, the other purpose of bringing in capital, I mean, this is how the railroads were built.
13:00
The rebels would railroad's probably would not have been built as effectively. or efficiently.
13:04
If people, investors who are putting up their capital, would have risked their entire net worth.
13:10
So they were able to form trusts and corporations that were protected by the government from litigation so that it separated that interest from their personal net worth.
13:20
And this is what you want to do to someone who brings money to the table into your operation. You want to use your company, because that's the purpose of the companies to indemnify its members.
13:28
So, you want to make sure that you have some language in your Operating agreement that says that the individual members should not be liable for the debts or obligations occurred by the LLC. And baked.
13:37
Make sure that when you execute an obligation or agreement on behalf of the LLC, when you sign for it that you sign.
13:43
Is a titleholder within the LLC such as Managing Member or Vice President or something like that so that you always acting behalf for the LLC and not yourself individually.
13:54
That way, you're always under that umbrella of indemnification. So, you want to have that into the into the contract as well.
13:59
Um, yeah, and, of course, the contribution should be described in this.
14:03
You know, so far, I will explain to you about, you know, cache, but contribution could be, I don't know that you want it to be Goodwill.
14:09
I think you want it to be something that you can touch, you know, something that you can spend, something that makes things happen. You know, if you're going to come into my company, maybe I'm going to let you do that.
14:18
I want you to do that because, you have some cash, and I want, I want to use it to do marketing, and then I want it, my expectation is to convert and and convert some new cash flow right away.
14:30
So, that's what, that's what I'm going to.
14:32
We're going to describe that, as your contribution, or, let's say, I need to do a project, and I don't have the right equipment, and it's expensive. But you already have the equipment.
14:39
And it's already been benefiting you.
14:41
Depreciated the value that equipment and whatever you were doing before.
14:45
But now you can lease it to me or you can bring it to the table and bring it as a contribution. And we can use it in this project and now we can make more money with it even though you've been making money with it doing something else. And now, all it's doing is giving you a tax write off.
14:55
But we can actually use it to make money.
14:57
All right, So that would be another example of a contribution, so you have to figure out how to how to value that and negotiate the, what that contribution is worth in the scope of the entire value of the company.
15:11
The starting things, are: you have an operating agreement, something to work from, the Operating Agreement has to give the authority to make the amendment or to add or admit, a new member?
15:18
And, yeah, there should be.
15:23
Yes, some some, some way to account for contributions.
15:29
And, we can always write that in there.
15:30
I mean, if you look at the examples I gave you, when I set up an operating agreement, there's a basic schedule in the appendices that talk about the percent interest and things you would just amend. Those are out of schedule.
15:40
All right, and let's see. So, then, of course, the contribution comes with it voting rights, like I just mentioned.
15:49
Um, I guess that would be a percentage.
15:53
I mean, I don't know how you want it, how you want to make that, but I guess whoever has the most money at risk, gets the most voting rights, he could probably run it like that.
16:02
I mean, would pretty much, it's open or whatever you want to do. There's almost nothing.
16:06
You can, you can do, Nothing that you can't do.
16:10
There would be things you could do that would that would violate State and Federal law, of course.
16:14
And this should be obvious like engaging in being engaged in a licensed activity or flight outbreak and the law, and things like that. I mean, obviously, I haven't seen that. I've never seen that. Never seen people do it.
16:26
I've seen, you know, like, you guys have probably, I've seen big corporations do things like that, and they get caught and nothing happens.
16:32
But the little guy, like small business owners and things like that, we gotta be aware that we're doing the right thing.
16:37
There's nothing to, I mean, when you bring on any partner, you may have developed some trade secrets and important aspects to your operations and you're gonna bring in somebody new that. Yeah, he brings some value and things like that.
16:47
But you want to have an agreement that, let's call it sequesters or retains all of the intellectual, capital, intellectual property, of the crete creativity, all the documented trade secrets, all the secrets. All the things that the private proprietary data that has been developed to run the company. Because that always happens.
17:06
You come and set up a business, and you will always come up with something that has to be creative, that no one else has ever in order to solve problems. And you, you document that so, a new person comes in and he may get access to all that information.
17:18
So you want to make sure that the new member agrees that that's going to be confidential and now he's part of that obligation to not disclose it to third parties.
17:27
And we've talked, I have a video on this that we're talking about, documenting proprietary information but that's, that's a key thing. So you want to have a confidentially confidentiality agreement, a clause in your contract for that.
17:40
And then some of that may include intellectual property.
17:42
So for example if if you bring on a new partner and you guys come up with some no thing that could be even licensed out, that becomes the property of the company.
17:52
So that way, no one, no one gets to use the resource of the partnership, and then develop an idea and then run off with that new idea, and leave it leave the partnership, and then, now, the partnership doesn't benefit from it, Right, That, that, that's to avoid those situations.
18:07
And then, once you've once you've made an agreement as to all these things, and you bring on the person, and you want to make it formal, it's important that you amend the article.
18:17
So if you publish the articles to start the company, like announced in the public or illegal publications journal, or you registered it with the state, you want to amend the articles with the state, or however you did it before.
18:28
So you're going to add that or the person there and maybe on the articles, I don't even think you have to disclose the interest of the of the other member or of all the members. However, you could. You can write an annual report that discloses all that you can disclose as much as you want.
18:41
But there are some minimums, but certainly, you want to amend your articles. Now, there's a couple things I didn't mention yet.
18:46
So this is these are things that always people overlook what I found anyways.
18:50
So, when you bring on somebody else, It's all exciting, and there's a new thing, and every is optimistic, But they never really talk about what happens when I leave, or if I have to leave or if I don't like you in a year or something like that, or if I get a better deal.
19:02
I'm not making the money I want, So I'm going to exit. So how do I exit? Why I want to exit in a way where I'm not going to disrupt the business, so we have an exit strategy.
19:09
So how does that work?
19:10
Well, maybe I can be bought out.
19:13
Maybe you can buy me out at a rate, OK, so we want to include the exit strategy so that the business is not disrupted.
19:22
Now, there are some situations where one of the partners may, I don't know, disappear, maybe die or get lost to see abducted by aliens, something like that loses mind.
19:31
And so it may disrupt the business.
19:33
So sometimes that a way to compensate for that is two, get more money.
19:39
So the way to get more money in those situations is to have insurance and one type of insurance you may want to look at in addition to having an exit strategy.
19:48
A buyout provision, terms on that. And there's plenty of examples, I mean, we're just scratching the surface here, we can, we can talk about this for a year.
19:54
I just want to give you an example of what you can do, and then we can go from there. There's something called key man insurance.
20:02
So, if someone is the brains of the operation, so to speak, and he has all the trade secrets, and he's been there forever, and then you're the new member, and you just come in, and you've been there for 18 months.
20:10
And the old man dies OK?
20:13
You want to ensure his value.
20:16
So you want you want to get a key man insurance policy.
20:19
And then there's also a buyout insurance. There's all kinds of ways to sort of a buyout clause. So this is the last part I want to explain to you.
20:25
So sometimes there's a buyout provision where you have to buy somebody out maybe because he wants to be bought out. Maybe it's time to be bought out, maybe he joined and said, I want to be bought out in five years or something like that and now it's the time. And so sometimes it's required and if you can't meet the buyout provisions sometimes you have to dissolve the company and maybe that's what you want to do. But maybe you don't want to dissolve the company.
20:44
So if for a buyout you may want to look for a Buyout type of insurance policy or some fund or funding, or method of getting funding to do a buyout ...
20:55
And with that there's always a valuation of the company value at that time.
20:59
So the buyout provision was based upon the current valuation of the company, not the original evaluation of the company So it's just almost like no buying anything. Buying stock, buying real estate, things like that.
21:10
So just have that in mind and then I'm going to leave this, this is going to be part of this video.
21:15
It's just another example one of many of an admission, a member admission contract.
21:25
Thanks for watching.