Wyoming LLC Operating Agreements and Wyoming LP Partnership Agreements

Wyoming LLCs and LPs are the perfect vehicle for anyone wanting to safety hold assets that are expected to increase in value. Because LLCs and LPs can be long-term entities, careful planning need to be done ahead of time to stave off problems down the road. Most states have few, if any, rules about how these entities are governed. Indeed, in Wyoming, often repeated words in the LLC statues are “unless the articles of organization or the operating agreement of that limited liability company provide otherwise.” Or in the LP statute: “except as provided in the partnership agreement”. Thus, your operating agreement or limited partnership agreement is very important.

In many states, there is no legal requirement for either entity to have a written agreement. However, by not doing one you leave yourself entirely at the mercy of your state’s laws or at the mercy of a judge trying to figure out the oral ambiguities of “he said/she said.” And, in many cases, whatever default laws do exist may not necessarily be written toy our benefit, or to the benefit of your entity. Generally speaking, state laws provide for an LLC or an LP to be run along the lines of a traditional corporation, which is likely to be much less flexible.

For example, without a written agreement providing otherwise, by default you could not allocate profits and losses in any way other than a straight pro-rata basis. So, if you had one member who contributed the cash and another member who contributed the sweat, you could not redistribute the profit and losses to provide extra losses and write-offs to the cash contributor in early years. Another example would be a voting deadlock between members. Without a written formula to break ties and move forward, some state laws require that the entity be dissolved in the event of a deadlock.

Do not leave these important decisions unaddressed so that you, by default, become subject to general, often unfavorable, state laws. Think about it – if the whole point of setting up your own LLC or LP is to take control over your business then why would you immediately give control over to someone of something else, especially a government?

You can have tremendous flexibility in how you structure your company. Do you want to have different classes of ownership interests with different rights? You can do it. Do you want interest to be valued based on services or cash depending upon the circumstances? Go ahead. Do you want to use common terms such as President, Secretary, and Treasurer to describe your managing members or managers (in the case of an LLC) or your General Partner (in the case of an LP)? No problem. Do you want to be able to split profits and allocate losses on a formula rather than straight ownership percentages? Consider it done, of course with the help of your CPA.

The downside to this incredible flexibility is that you, as the owner, need to have some forethought and careful planning before you draft your entity’s operating agreement or limited partnership agreement. This is the operating structure for your entity, and it needs to be comprehensive enough to handle all sorts of issues that may come up now, or well down the road into the future.

Another important thing to think about if you are considering running an LLC or LP without an agreement is whether that could be used as evidence to show that you are not really operating a business, but using a business name as a front to avoid liability. One of the things that a potential litigant’s lawyers will look at is whether you keep entity (LLC or LP) records, and whether these records are up to date. If you do not keep at least minimal LLC or LP records, you can expect an argument in court that you are not really operating as a protected entity, but rather as an unprotected sole proprietorship or general partnership.

The following are several questions and areas to think about when formulating your operating agreement or limited partnership agreement.  Most of these questions are interchangeable between the entities and are equally applicable.

·         Will your LLC or LP be owned by a single person, a couple, a family, or by unrelated parties?

·         Will your LLC be operated as a member-managed LLC or a manager-managed LLC? If manager-managed, must be your manager(s) also be member(s)?

·         If you decide to go with a manager-managed LLC, most of the day-to-day decisions will be made by the manager. What decisions do you want made by the full membership?

·         Will everyone be contributing equal amounts of (a.) time and (b.) money or assets?

·         What are the expectations of the members? Will some be actively operating the business while others are passive?

·         How will the LLC be taxed? As a partnership or as a corporation?

·         How will you handle profit distributions? Do you want a standard percentage ratio, or do you need to make some special arrangements, to take into account varying member contributions and performance expectations?

·         How will members be able to leave the LLC? Will outsiders be permitted to buy in?

·         Do you want the LLC to have a buy-out provision in the case of the death or divorce of a member?

·         How will you handle situations in which the LLC needs money?

·         Do you want the LLC to have a buy-out provisions in the case of a member who is not performing to assigned expectations?

·         What happens if you and the member fight among yourselves? Do you want the LLC to have some type of buy-out provision of one or more members in case of a disagreement? If so, how will you choose who gets to stay and who is bought out?

·         What happens if a member is in financial or legal trouble and a creditor attacks that member’s interest in court? Do you want to allow creditors to attach a member’s interest in court? Do you want to allow creditors to attach a member’s interest through the use of a charging order or do you want a lawsuit to trigger a member buy-out?

·         If your LLC or LP is used by your family as an estate planning vehicle, have you thought about how to manage the transfer of power and control from one generation to the next, as well as what to do in cases where the next generation isn’t quite ready for the challenge?

These questions are intended to get you thinking. You should be aware of the various elements that go into these types of agreements in order to help you determine what needs to go into yours. But, under no circumstances should you have to consider this sufficient advice and not also seek counsel from our own attorney, CPA or tax advisor.