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Checklist of Provisions for an LLC Operating Agreement For Film Production

It is increasingly common for film producers to use LLCs as a way to raise funds for production and limit liability of the producers and investors. Below is a checklist of provisions that should be discussed with production counsel prior to forming your LLC.

1. Introductory Clauses and Definitions (Both are optional but common; these will be included unless noted otherwise)

  • Recitals as to the “persons” forming the LLC
  • Recitals as to the objectives of the LLC
  • Recitals as to the possibility of or intention to admit additional members
  • Appropriate recitals if the LLC replaces a previous agreement between the parties

 

2. Basic Membership Structure

  • Analogous to a corporation: In LLCs the role of “Director” is fulfilled by the “Manager”; the equivalent of a shareholder is the “member”;
  • All common units or division between common and preferred? By default, LLCs have one type of ownership, these are called “Units of Membership Interest” or just “Units”; you can think of them like shares of stock
  • Different classes of preferred?
  • Do all members have the same rights, or should there be different classes for voting, distributions, or both?
  • If the LLC is being formed for the purposes of producing a film, careful consideration should be given to the rights (voting, non-voting), obligations (additional capital) and priority of distribution (before deferred compensation is paid to cast & crew?) of investor’s Units.

 

3. Purposes

  • Should the LLC be organized for “Any lawful business activity” or limited to something more specific? (By default, the LLC will be organized with a broad, general business purpose, unless noted otherwise)
    • Specific line of business (e.g., manufacture lighting fixtures)
    • Performance of a Specific contract? (e.g., perform the obligations under a certain government contract)
  • State that the purpose of the LLC is for a certain business, but then add another provision allowing “any lawful business?”

 

4. Duration (By default, the LLC will be organized for unlimited duration unless noted otherwise)

  • Continue until dissolved?
  • Some fixed term?
  • Automatic renewals after that?

 

5. Membership Certificates

  • Not necessary – can provide that a notice will be provided to any member specifying his or her interest on request
  • Can develop one and put it as an exhibit
  • Do you want to provide details, such as who can sign certificates, etc. e.g. “Secretary”
  • Procedures for replacing lost certificates?

 

6. Seal – If Desired (highly uncommon)

 

7. Statement of Limited Liability (By default, the LLC will provide for limited liability of the members, unless noted otherwise)

 

8. Capital Contributions

  • Often listed in an exhibit (Can be cash, stock of another company, or services)
  • Should the agreement provide for the amendment of that exhibit from time to time?
  • If no additional capital contributions are allowed, the agreement might so provide.
  • If additional capital contributions are called for, the procedures for making them should be spelled out.
  • The liabilities and responsibilities of the parties in the event a member does not make a required capital contribution when one is called for should be spelled out in detail, including procedures to be followed.
  • This is a good place to think about what “intellectual capital” is being contributed to the LLC. For example, is one of the members also the screen writer?

 

9. Capital Accounts

  • Agreements generally provide that no interest shall be paid on any capital account and that no member is entitled to the return of his or her capital account.
  • Required by tax law and also as a practical matter so that members know the value of their interests from time to time.
  • Tax law contains some complex but mandatory rules, agreement should incorporate those by reference and provide that capital accounts should be maintained in accordance with those rules.
  • Same for allocations of income, gain, loss, deductions, and credits.
  • Provide that, if LLC provisions are inconsistent with tax law, the tax law governs.
  • Consider review by a tax expert.

 

10. Distributions

  • Procedures for calling for and making distributions (can be open-ended – i.e., distributions made when members agree).
  • Made in proportion to their membership interests?
  • Is it appropriate to have mandatory quarterly distributions in the amount of each member’s expected tax liability so that such liability could be paid with the quarterly estimates?
  • Prohibition of any distribution which would violate relevant laws.

 

11. Dissolution

  • When specified in the relevant documents
  • When the members (or managers) decide
  • Appointment of a “liquidator”
  • Final accounting procedures
  • Assets sold, distributed to members, or a combination?
  • Priorities for distribution
  • creditors (include members who are also creditors?)
  • members, in accordance with the law or relevant documents
  • Requirement that certificate of formation be canceled upon dissolution

 

12. Management

  • By Members or Managers?
  • Generally, Members elect Managers, who then appoint officers
  • Management by members
    • Who is a member?
    • Member of record as of a certain date?
    • Need to prepare a list of members entitled to vote?
    • Can an interested member participate fully, or only for those transactions in which the member is not interested?
  • Meetings
    • When? How frequent? Where?
    • Is action by written consent OK?
    • Telephone meeting OK?
    • Notices of meetings
    • Quorum
    • Adjournments
    • Minutes or records of meetings
  • Committees
    • How appointed?
    • Whom do they represent?
    • How can they be removed?
    • What powers do they have?
    • Any additional compensation for members serving on a committee and attending committee meetings?
  • Majority rule for all things, or supermajority for some? (What vote is required to effect a decision?)
    • If supermajority, this must be defined (e.g. 60%, 75%, etc.)
    • Appointment or removal of certain officers or individuals?
    • Material change in the nature of the business?
    • Transactions over a certain dollar amount?
    • Borrowings, pledges or leases over a certain amount?
    • Any merger or acquisition or any sale of a portion of the business?
    • Any change in the governing documents?
    • Admission of new members or removal of existing members?
    • Transactions between the LLC and any of the members?
    • Liquidation? (Usually by unanimous consent, unless otherwise noted)
  • Management by Managers
    • Issues similar to those in the by-laws of regular corporations
    • How many managers?
    • How elected? How removed?
    • Term of office
    • How are vacancies to be filled?
    • Meetings – regular / special
    • Other issues similar to those above
  • Officers
    • Issues similar to those in a corporation
    • Which officers?
    • How appointed?
    • To whom do they report?
    • Removal
    • Resignation
    • Compensation

 

13. Indemnification

  • Decision as to whether to take maximum advantage of all flexibility allowed by state law
  • Generally this is done – sometimes even including any flexibility authorized by new laws.
  • Procedures for indemnification
    • Who authorizes?
    • Include advancing defense costs?
    • Indemnification even after termination of relationship of indemnified party with the company?
    • Exclusion for claims brought by the person seeking indemnification?

 

14. Insurance

  • Include authorization to purchase Director and Officer insurance.

 

15. Transfers of Membership Interest

  • Allowed, but only with the consent of [ALL Members? ALL Managers? By vote of Members of a certain class?]
    • only if the transferee executes the same documents executed by the other members?
    • Exceptions for such things as transfer to related parties or affiliates?
  • Rights of the transferee until the transferee is admitted as a substitute member?
    • Generally, transferee has no right to vote or participate in the management of the business.
  • Should there by a right of first refusal on the part of the LLC, or the other members of the LLC, if a member wants to transfer its interest to an unrelated party?
  • Transfer to Bona Fide Purchasers?
  • What is the formula by which Membership interest is valued? [e.g. Appraisal, “Book Value”, Modified Book Value”?]
    • Discount/Penalty for early withdrawal by a member?

 

16. Withdrawal

  • Can be governed by the agreement.
  • May not be able to prevent withdrawal, but agreement could make such withdrawal a breach and establish certain rights and remedies.
  • No member can withdraw or be repaid its capital contribution.
  • No withdrawing member can receive any of its capital contribution unless all debts of the LLC have been paid or provided for.
  • Exception for any restrictions on withdrawal upon consent of all the other members?

 

17. Books and Records

  • Complete and accurate books and records to be maintained and kept at (designated place).
  • Often the company’s principal place of business
  • Must maintain a complete and accurate list of all members and their membership interests.
  • Provision allowing any records to be kept electronically.

 

18. Fiscal Year

  • Important to establish – often the calendar year.

 

19. Tax Classification

  • Generally a partnership and members should agree not to do anything inconsistent with that.
  • Should designate a “tax matters partner” and should establish the duty of the tax matters partner to file returns, consult and notify members as appropriate, etc.
  • For what things might the tax partner be required to obtain permission from the other members? (Perhaps anything contemplated by §§ 6222-6232 of the Internal Revenue Code?)

 

20. General Provisions

  • Entire Agreement
  • Amendments (Vote required?)
  • Governing Law
  • Notices
  • Successors and Assigns


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