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11 J. Passthrough Entities 23 (2008)
Common Mistakes and Oversights When Drafting and Reviewing LLC Operating Agreements

handle is hein.journals/passtent11 and id is 23 raw text is: January-February 2008 Common Mistakes and Oversights hen Drafting and Reviewn LLC Operating Agreements By Warren P Kean Warren Kean reports from the 2007 Fall Meeting of the joint task force of the LLCs, Partnership and Unincorporated Entities Committee and the Taxation Committee of the ABA Business Law Section on the many common mistakes and oversights that are frequently encountered when negotiating and reviewing limited liability company operating agreements. A t the 2007 Fall Meeting of the LLCs, Partner- ships and Unincorporated Entities Committee of the American Bar Association's Business Law Section, the Model Real Estate Limited Liability Company Operating Agreement (which is based on the Delaware Limited Liability Company Act) was presented for publication (the Model Agreement).' During the course of drafting that agreement and its extensive commentary, the joint task force of the LLCs, Partnerships and Unincorporated Entities Committee and the Taxation Committee of the ABA Business Law Section responsible for the project (the ABA Joint Task Force) discussed many common mistakes arid oversights that frequently are encountered when negotiating and reviewing operating agreements. This article describes some of those miscues and over- sights, all of which, and others, are discussed in more detail in the commentary to the Model Agreement. Warren P. Kean is a partner in the law firm of Kennedy Covington Lobdell & Hickman, L.L.P. in Charlotte, North Car olina. Mr. Kean is the chair of the joint task force of the LLCs Partnerships and Unincorporated Entities and the Taxation Committee of the American Bar Association's Business Law Section that drafted the Model Real Estate Limited Liability Company Operating Agreement, and he is the immediate past chair of ABA Business Law Section's Taxation Committee. Economic Matters Membership Interests Each member of a limited liability company (LLC) has one, and only one, membership interest. One never owns membership interests. Unlike the law for business corporations that man- date that shares of capital stock of the same class or series convey identical rights and preferences, there is no comparable concept or requirement under LLC statutes. Instead, membership interests (even those that are described in the operating agreement as being comprised of units or shares) may, and frequently do, on a per-unit or per-share basis, have different interests in the management., capital, profits, losses, and tax attributes of the LLC. A com- mon mistake is to forget to take those differences into account when drafting the buy-sell, preemptive rights, co-sale rights, drag-along rights, put and call options, liquidating distribution, etc. provisions of the operating agreement. For example, under the hypothetical facts presented in the Model Agreement, the Financial Investor pays $10 million for 4,000 Units ($2,500 per Unit), but the Developer pays nothing for its 4,000 Units. Upon the sale or refinancing of the LLC's assets, the Financial 02008 WP. Kean JOURNAL OF PASSTHROJGH ENTITIES

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