Limited Liability Company Agreement
(DE Joint Venture, Managing Member-Managed)

Summary

This template LLC agreement can be used for a Delaware limited liability company (LLC) joint venture between a passive majority member and a minority managing member. This agreement provides for separate capital accounts for each member. This template includes practical guidance, drafting notes, and alternate and optional clauses. In general, parties come together to form joint ventures when all involved believe that they will have greater success working cooperatively on a specific project, product, or business than they would have if they each undertook the endeavor on their own. More often than not, each of the parties individually lacks all of the requisite practical knowledge, resources, and/or funding for the venture's success. See Joint Venture Structuring and Planning. In this template, the majority member takes a passive investment role with certain reserved rights, while the minority member acts as the Managing Member to operate the day-to-day of the joint venture. Counsel should carefully modify the balance of reserved rights and powers of the Managing Member to match the parties' desired intent. Co-venturers may choose to form a separate LLC entity in which they would hold membership interests and through which they would conduct the venture's business. LLCs have become a particularly popular choice of joint venture entity because they combine some positive attributes of both partnerships and corporations and offer their members maximum flexibility in structuring the venture and its operations: • Tax. An LLC member can choose to either (1) assume the tax obligations of the joint venture or (2) elect to have the joint venture treated as a corporation with the obligation to pay taxes on its profits. If the member assumes the obligation to pay the joint venture's taxes, the profits and losses flow through the financial statements of the joint venture to the members on a pro rata basis at each member's effective tax rate. See Tax Issues When Entering into Joint Venture LLCs. • Accounting. In making their choice as to tax treatment, the LLC members can also determine whether or not the profits and losses of the joint venture impact the income statements of individual joint venture members. • Limited liability. Similar to a corporation (and unlike a partnership), LLC members' liability is typically limited to their percentage ownership interests in the LLC. LLC members can also contractually limit their obligations and liabilities among themselves. In Delaware and some other jurisdictions, they may also limit their liability under the terms of the agreement for breaches of fiduciary duties that would otherwise apply if the parties did not specifically opt out of them. Section 18-1101 of the Delaware LLC Act (6 Del. C. § 18-1101) expressly allows members of an LLC to insert in their operating agreement a provision that they do not owe each other any fiduciary duties. See Waiver of Fiduciary Duties Clause (Joint Venture LLC, DE). • Laws and regulations. LLC members can choose which laws and regulations to apply to the joint venture. Certain laws will not apply to an LLC unless the parties elect to be treated as a corporation or do not otherwise disclaim or limit corporate duties under the terms of the operating agreement. For example, members can make a determination as to whether they will be treated as a corporation or partnership for federal and state tax purposes. Under Section 122(17) of the DGCL (8 Del. C. § 122), members can waive the application of certain business opportunities from the corporate-opportunity doctrine or they can waive the application of all fiduciary duties. This template LLC agreement makes the following assumptions: • A minority member will act as Managing Member to operate the venture, with the majority member in a passive or investment role. Common reserved rights are included as optional provisions for use by the passive majority member. • The LLC will be governed by Delaware law. • The members are private, domestic U.S. entities or individuals. • There is one class of membership interest. This agreement contains optional clauses that can provide for two classes of membership interests. • There is no non-competition covenant. • While this draft is intended for use by an LLC with two members, the optional provisions can allow for additional members. For a joint venture LLC agreement managed by a Board of Managers, see Limited Liability Company Agreement (Joint Venture, DE). For additional information on joint ventures, see Joint Venture Transactions Training Presentation, Joint Venture Resource Kit, Key Provisions in Joint Venture Agreements, Exit Provisions in Limited Liability Company Operating Agreements, Joint Venture Formation Checklist, and Joint Venture Structuring and Planning — Basic Forms of Joint Ventures.