Capital Call Provision Operating Agreement
Once again, the LLC is not in tax transit in multi-headed LLC agreements (including joint two-member LLCs). The 2nd member LLC must file a mandatory information statement form IRS 1065. The result is also an IRS K-1 form for each member to report the benefit or loss of tax on each member`s 1040 return (for natural taxpayers). Enterprise agreements often have separate provisions regarding the distribution of operating cash flows and the distribution of “capital transaction” products, such as a sale or financing. Distribution priorities may vary from category to category. For example, returns on preferential investments from distributions may be payable on both operating cash flows and capital transaction income, but returns on investments can only be paid on capital transaction income. In addition, the order of payment for certain items may vary by the two categories. As a threshold issue, the court had to decide whether the Browns had only 50 per cent of Heartfelt, which would deprive them of the legal authority to merge the Groves. The Heartfelt Enterprise Agreement provides that, like any business, an LLC may in future have unexpected or unmetifiable capital requirements. To the extent that members wish that future capital requirements should be met by loans from third-party lenders, such a preference may be defined in the enterprise agreement, which may contain provisions specifying the amount that can be borrowed, who makes the decision (or who has the right to make it) and the terms of the loan. Similarly, to the extent that members wish to meet future capital requirements by welcoming new equity investors, which can be indicated in the enterprise agreement, as well as the desired restrictions, on the amount that can be increased in this way and on how the conditions for new investments are defined. Capital appeals themselves are not “bad” or prejudicial and can and may serve an important purpose for the LLC and its members, but members negotiating their enterprise agreement should be aware of these provisions and discuss with other members the date and conditions under which capital calls may be made, if at all.