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Default Rules for an LLC in the Absence of an LLC Written Agreement.

Below are a few examples of the Georgia default rules for an LLC and how and where they can be modified.

  • Agency of Members and Managers [1]:Under the default rules, every member of the LLC is an agent of the LLC for the purpose of its business and affairs and can bind the LLC. This type of power vested in all of the members of the LLC has the potential to cause a lot of financial and business headache if you are not aware of or have not approved the decisions and actions of a certain member. You have the option in the articles of organization to elect to have your LLC as a manager managed LLC. Doing so negates the rule that all members are agents of the LLC. To provide you with further protection, specifically allocate authority to certain managers in your operating agreement.
  • Liability of Members and Managers [2]:It is important to note that the duties for members and managers set forth in the default rules can be considered a bit vague. Specifically, the rule states that managers or members “shall act in a manner he or she believes in good faith to be in the best interest of the [LLC] and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Perhaps more importantly to note is that a member, in a manager managed LLC does not have any duties to the LLC just by acting as a member. It is wise to modify these default rules to fit what is best for your LLC. Such modifications may include expanding, reducing, or eliminating duties.
  • Unanimous Consent to Certain Events [3]:The default rules specify that a unanimous consent of the members is required to approve dissolution of the LLC, a merger of the LLC, the “sale, exchange, lease” or “transfer of all or substantially all of the assets of the LLC,” admission of new members to the LLC, an amended to the articles of organization, an action to reduce or eliminate of capital contributions, actions to approve distributions, and an action to continue an LLC. If these rules are too stringent for your needs, consider altering or eliminating them in your written operating agreement.
  • Meetings [4]:The default rules also provide guidelines as to the meetings of the LLC. For those LLC with more than one manager, meetings of managers can be called by any manager, two days’ notice is to be given for the meeting, a majority of the managers constitutes a quorum. Additionally, meetings of members may be called by at least 25 percent of the members and members are entitled to at least two days’ notice of the meeting. Furthermore, a majority of the members shall constitute a quorum. If you would like to alter these rules, such as requiring at least 10 days’ notice for a meeting, or that the meeting shall be in person and in a specific location, put such language in a written operating agreement.
  • Contributions [5]:Under the default rules, contributions to the capital of an LLC “may be in cash, tangible or intangible property, services rendered, or a promissory note or other obligation to contribute cash or tangible or intangible property, or to perform services.” If you would prefer that capital contributions to the LLC be made in the form of cash only, state so in your operating agreement. Furthermore, if you have an agreement whereby one member may contribute capital in the form of services rendered, be sure to specify in detail what these services involve.
    Also be mindful that a mere promise to make a capital contribution to the LLC is not enforceable under the default rules. Instead, such an agreement must be set forth in your operating agreement. If you want there to be a penalty for failing to make a capital contribution, such as reducing or eliminating a member’s interest, you need to state this in your operating agreement.
  • Allocation of Profits and Losses [6]:If you fail specify in your operating agreement how you would like to allocate profits and losses for your LLC, then the default rule applies whereby profits and losses will be allocated equally among members. This can be one of the biggest areas of contention among members of an LLC in the absence of a written operating agreement. Be sure to protect your interest in the LLC by designating how profits and losses should be shared.
  • Distributions [7]:You might have a verbal agreement with another member of the LLC whereby you have decided to share distributions 60/40. If this agreement isn’t in writing, the default rules apply and you could be stuck sharing distributions equally among the members. Avoid this situation by specifying in your operating agreement how you desire distributions to be shared.

The above constitutes just a portion of the default rules for a Georgia LLC. To protect your interest in an LLC, consider having a signed, written operating agreement to appropriately govern your LLC.

[1] O.C.G.A. § 14-11-301.

[2] O.C.G.A. § 14-11-305(4).

[3] O.C.G.A. § 14-11-308(b).

[4] O.C.G.A. § 14-11-310.

[5] O.C.G.A. §§ 14-11-401, 402.

[6] O.C.G.A. § 14-11-403.

[7] O.C.G.A. § 14-11-308(a).

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