Picking the Operating Agreement
From Vermont Virtual
Insert non-formatted text hereOnce we launch, we will offer a template operating agreement.
Under Vermont law, a limited liability company can establish most of the terms of the relationship among members by means of a contract, known as an operating agreement. We will recommend that many of the terms of the operating agreement also be incorporated in the company's articles, as filed with the Secretary of State. (This will help to put third parties on notice that members don't have the right to bind the company by contract absent an explicit agreement or majority vote of active members to grant such authority).
Once the template operating agreement is final, we will post it here.
Basic terms will include the following:
- membership criteria, if any
- provision for designation of members as "active members" by means of receipt of rating points from founders, at the outset, or from other active members.
- only active members can vote and award rating points to other members. (Active members will have votes and the power to award rating points in proportion to the number of rating points they themselves have received.)
- members may vote to use net proceeds to make payments to members whose contributions have caused other active members to grant them rating points. If they do so, payments will be made in amounts determined by the portion of unexpired rating points possessed by various active members and will be considered payments to independent contractors.
- all members agree to assign to the virtual company all intellectual property rights to any works or inventions produced by them in the course of the company's business.
- a majority vote of all active members is required to make decisions for the company (e.g., to grant to an individual the right to act as an agent of the company)
- The company will elect to be treated as a C corporation for tax purposes and will cause all necessary tax filings and payments to be made as required.
- Disputes among members relating to the virtual company will be resolved by means of online dispute resolution.
- The company will designate an agent for service of process (which shall also provide the address listed as the company office).
- Meetings of the membership will be conducted online in an asynchronous format.
- Neither the contractual rights of members under the operating agreement nor the entitlements of members to receive payments pursuant to such agreement are transferrable or heritable. Such rights shall be extinguished upon conditions stated in the operating agreement.
A form of questionnaire that reflects many of these questions and integrates with the operating agreement stated below is as follows:
OPERATING AGREEMENT QUESTIONNAIRE
This questionnaire is intended to allow the founders of virtual limited liability companies to create operating agreements which reflect their wishes in connection with the economics, governance and other aspects of their virtual LLCs. References to the “standard agreement” refer to the prototype virtual limited liability company operating agreement. (Provision of the standard agreement or this questionnaire does not constitute the provision of legal advice. Founders are urged to consult their own attorneys and advisors as to matters related to their LLCs.) Please refer to the standard agreement for a complete understanding of its provisions as to the matters described below. Unless they are defined in this questionnaire, capitalized terms have the meanings given them in the standard agreement.
1. Work Product. The standard agreement contemplates transfer of all work product created “in the course of company projects” to the Company.
Is this acceptable? Yes No
If not, what are the expectations for Members to transfer their intellectual property with regard to Company projects to the Company?
______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
2. Economics. The economics in the standard agreement work as follows:
(a) Members are entitled to receive payments of net revenues of the Company (after payment of all other Company expenses and working capital reserves) through allocations of “Points” to them. Points are allocated by vote of the Members (except that Members are not allowed to award points to themselves). Points are allocated on a quarterly basis. Points for the initial period are allocated by the founders of the Company.
(b) Points that are awarded are cumulative throughout the life of the Company, but if no Points are allocated to a Member for three consecutive quarters, all Points previously accumulated by that Member are void. (This is to encourage continued participation in the Company.)
(c) Members who have received Points during the prior quarterly period are eligible to vote on who gets Points during the next quarterly period.
Is this arrangement as to Points acceptable? Yes No
If not, please indicate what changes are necessary: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
3. Voting. All decisions with respect to the Company, including amendments to the Agreement may be taken by means of the vote of active Members who were allocated a majority of the Points allocated during the immediately preceding quarterly period and voting during a period of at least one week. (Active Members are Members who received Points during the immediately preceding quarter.)
Is this voting arrangement acceptable? Yes No
If not, please specify the desired voting arrangement: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
4. Tax Matters. The Company is to be treated as a Subchapter C corporation by making an election to that effect with the Internal Revenue Service. The persons receiving revenues from the Company are intended to qualify as independent contractors with such payments recognized by them as ordinary income.
Is this tax election and arrangement acceptable? Yes No
If not, please specify alternative arrangements: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
5. Governing Law. The standard agreement provides that the laws of the State of Vermont shall govern it and has been prepared in accordance with Vermont law (to take advantage of Vermont’s virtual LLC provisions).
Is this acceptable? Yes No
If not, please specify alternative state governing law: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
6. Arbitration. The standard agreement provides that disputes will be settled by on-line arbitration by Virtual Mediation and Arbitration System, LLC.
Is this arrangement acceptable? Yes No
If not, please specify an alternative arrangement: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
7. Transferability of Interests. The standard agreement provides that interests in the Company are not transferable and terminate upon the death of the Member concerned.
Is this arrangement acceptable? Yes No
If not, please specify an alternative arrangement: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
8. Dissolution. The standard agreement provides that upon dissolution and liquidation of the Company any remaining assets will be distributed in proportion to valid Points held by the active Members.
Is this arrangement acceptable? Yes No
If not, please specify an alternative arrangement: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
9. Termination of Access and Active Membership. The standard agreement provides that a Member’s status as an active Member may be terminated by a vote of a majority of the votes cast by active Members.
Is this arrangement acceptable? Yes No
If not, please indicate what changes are necessary: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
10. Contracts With Third Parties. The standard agreement does not permit contracts with third parties other than an agreement signed with the founders. Absent a further agreement, no Member is allowed to sign any contract on behalf of the Company unless expressly authorized by a decision of the members to do so.
Is this arrangement acceptable? Yes No
If not, please specify an alternative arrangement: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________
11. Founders Agreement. The standard agreement provides for a separate founders agreement. Please review the separate form of founders agreement and determine if the agreement is in acceptable form.
The current draft of the template operating agreement is as follows. It has not been finalized.
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
Member-Managed Limited Liability Company
Each Member of the Company agrees to be bound by the following provisions:
Work Product. All Members irrevocably transfer and assign all right, title and interest to any work product created (now or in the future) in the course of Company projects to the Company. In creating any work product for the Company or otherwise performing services for the Company, Members shall be independent contractors of the Company.
Point Allocation. At the end of the first full calendar quarter following the creation of the Company (the “Initial Period”), the founding member(s) (the “Founder(s)”) shall determine the number of Points to be allocated to each Member of the Company (including the Founder(s)) with respect to contributions made prior and up to the last day of that quarter. At the end of each calendar quarter thereafter, Active Members, as defined below, or their designated representatives shall determine the number of Points to be allocated for the Period then ended.
Points Received. Points received by each Member will be cumulative throughout the life of the Company; but if no Points are received by a Member for three consecutive Periods, all Points previously accumulated by that Member shall become void. (Members who have Points that have not expired are referred to as “Active Members”).
Payment of Revenues. The Active Members shall decide the amount of revenues to be paid out to Members (“Member Payments”) during any Period. Revenues shall be paid to Members in proportion to the number of valid Points held by each Member as a percentage of all valid Points outstanding. From time to time, the Active Members may decide to multiply all valid Points by a factor designed to adjust the number of Points in light of the size of the membership entitled to receive Points or for other reasons. Unless otherwise decided by the Company, all Member Payments shall be deemed compensation to the Members for their contributions to the Company as independent contractors.
Liability of Members. The debts, obligations and liabilities of the Company are solely the debts, obligations and liabilities of the Company. A Member will not be personally liable for a debt, obligation or liability of the Company solely by reason of being or acting as a Member or Active Member.
Decisions by Members. All decisions and any, consent, approval, or action of the Company may be taken by means of a majority of the votes cast by Active Members entitled to vote and voting. Each Active Member may cast a number of votes equal to the number of Points previously awarded to such Active Member and still valid. The Active Members may designate one or more agents to act on their behalf as to matters with respect to the Company, including an agent designated to vote on Company matters, and to allocate Points. The Company may, by decision of the Active Members, authorize agents to sign documents or otherwise act on its behalf.
Founder(s) Agreement. During the Initial Period, the Founder(s) may cause the Company to enter into an agreement with the Founders on such terms as are agreed upon by the Founder(s) and are disclosed to the Members.
Tax Election. The Company shall elect to be treated for federal and state income tax purposes as a “Subchapter C corporation”. The Founder(s) or their designee(s) shall be the shareholder(s) (the “Shareholder(s)”) of the Company for federal and state income tax purposes.
Choice of Law. The law of the State of Vermont shall govern this Agreement.
Arbitration. The Members agree that any and all disputes related to or arising from this Agreement will be resolved through online arbitration under the rules of and as facilitated by Virtual Mediation and Arbitration System, LLC.
Non-transferability. Any interest of a Member in the Company created under this Agreement will be non-transferable and shall terminate upon the death of the Member.
Registered Agent. Gravel and Shea is the Company's registered agent in the State of Vermont. The registered agent’s office is located at 76 St. Paul Street, Burlington, VT 05401.
Designated Office. The location of the principal place of business of the Company will be the office of the Company’s registered agent.
Termination of Access and Active Membership. A Member's status as an Active Member, may be terminated by vote of a majority of the votes cast by voting Active Members within 2 weeks after such termination is proposed by any Active Member.
Contracts With Third Parties. With the exception of the agreement between the Company and the Founder(s) described above, no Member or any other person may sign a contract on behalf of the Company unless expressly authorized by a decision of the Members to do so, and any contract signed without such express authorization will be invalid.
Integration. This agreement constitutes the entire operating agreement among the parties.
ACKNOWLEDGMENT OF ARBITRATION. This agreement contains an agreement to arbitrate. After entering into this agreement, I understand that I will not be able to bring a lawsuit concerning any dispute that may arise which is covered by the arbitration agreement, unless it involves a question of constitutional or civil rights. Instead, I agree to submit any such dispute to an impartial arbitrator as described above.
