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.
- 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.
- 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.
- 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
- 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?
- When? How frequent? Where?
- Is action by written consent OK?
- Telephone meeting OK?
- Notices of meetings
- Minutes or records of meetings
- 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
- Issues similar to those in a corporation
- Which officers?
- How appointed?
- To whom do they report?
- 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?
- 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?
- 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
- Successors and Assigns
- Limited Liability Company Taxes (turbotax.intuit.com)
- How to Form an LLC (answers.com)
- How To Set Up Your Blog Business Structure (johnchow.com)