My practice is focused on LLC formations and conversions and I've written a formbook and practice manual, published by Aspen Law & Business, on how to draft LLC agreements. Because of this background, I'm often asked by clients or their accountants to review LLC agreements written by other lawyers.

In making these reviews, I've seen a lot of fine work and I've learned a lot. But I've also seen a lot of truly inferior work. In this article, I'll describe the eight most common and most serious LLC agreement drafting errors that I've encountered. I hope that in drafting LLC agreements for your clients, you'll find my list useful.

In the discussion that follows, I'll only be talking about LLC agreements for multi-member LLCs taxable as partnerships. Agreements for LLCs taxable as S corporations and for single-member LLCs are a different story (but not always a happy one).

LLC agreements that aren't tailored to the actual deal. In negotiating and drafting LLC agreements for actual deals, I'm a great advocate for using model agreements as starting points and templates. These model agreements can help you identify the relevant issues; they can provide you with major guidance in resolving these issues; and they can greatly increase your efficiency in the negotiation and drafting process.

However, all too often I see LLC agreements that are hardly more than photocopies of model agreements with specific names and addresses inserted for the parties. These agreements show little or no awareness of the myriad specific and unique issues that every LLC deal inevitably involves - for example, special issues regarding dissociation events, buy-sells, fiduciary duties or voting rights.

1) LLC agreements that are based on the wrong form. By my count, there are a total of 14 main types of LLCs, each of which is so different from the other 13 as to need its own model LLC agreement. The model LLC agreement you'll need for a venture capital deal is very different from the one you'll need for an asset protection LLC or an operating LLC for a mom-and-pop convenience store. Slavish adherence to a form is a very bad thing. (See Point 1, above.) Use of the wrong form is even worse. I see this "wrong form" error in perhaps many as 50 percent of the LLC agreements I'm asked to review.

2) No table of contents. LLC deals among two or more parties inevitably involve at least a couple of dozen relatively complex legal and tax issues; so most LLC agreements worthy of the name should normally be at least 25 pages long. However, you should never ask a client or another lawyer to read an LLC agreement of that length unless you start the agreement with a relatively detailed table of contents that will orient the reader to the agreement as a whole and thus make it easier for him or her to digest its specific contents. First the forest, then the trees. And of course Word and WordPerfect make the generation of such a table of contents effortless.

3) Agreements that fail to address key LLC issues. The basic form I use in forming LLCs - designed "Form 10.1" in my Aspen book - contains 32 sections and 230 subsections; the 21 specific model agreements I use are all mere modifications of Form 10.1. My goal in drafting the form was to identify every conceivable legal and tax issue that can possibly arise in all but the most esoteric LLC deals - and thus to avoid overlooking any of these issues in actual deals. When I review an LLC agreement drafted by another lawyer, my method is essentially to compare his or her agreement with Form 10.1. Very often, I discover a dozen or more significant issues on which the agreement is entirely silent - and often enough, these are issues for which the default and mandatory rules of the governing LLC act also provide no guidance.

Among the issues I find to be the most neglected in LLC agreements I'm asked to review are those regarding (i) members' pre-formation representations and warranties, (ii) tax distributions, (iii) fiduciary matters, (iv) the specific responsibilities and time commitments of members who are to be active in the LLC's business, (v) member and manager suspensions and expulsions, and (vi) methods of dispute resolution. Failure to address these or other key issues in an LLC agreement can lead to intractable conflicts among the members within a few years after an LLC's formation.

4) Needless tax boilerplate. At least half of the LLC agreements that I am asked to review begin with a section consisting of a dozen or more definitions of abstruse federal income tax terms - partnership minimum gain, partner minimum gain, qualified income offset, etc.; and these agreements often contain pages and pages of substantive federal income tax provisions that provide safe harbors under Internal Revenue Code Section 704(b) for the validity of "special allocations" (i.e., allocations of profits and losses disproportionate to contributions), set forth special rules under IRC Section 704(c)(1)(A) concerning contributions of appreciated property, and address other complex federal income tax arrangements among the members.

The problem with all of these definitionsand substantive provisions (most likely slavishly copied from model agreements) is twofold:

• First, the vast majority of LLC agreements for New Hampshire LLCs are written for LLCs that, from a tax viewpoint, are "straight-up partnerships" - i.e., LLCs that will make allocations and distributions to the members that are strictly proportionate to member contributions. For these LLCs, the above tax provisions are entirely unnecessary.

• The prose in which the above tax provisions are expressed is always ugly and largely unintelligible to non-specialists. Why include such prose in any writing unless you absolutely have to?

5) Needless legalese. I'll be the first to admit that when tax provisions are needed in an LLC agreement, it's hard to write these provisions in plain English. That's why I think tax provisions of any complexity should generally be relegated to appendices and that clients should be advised not to bother reading them. However, most or all of the non-tax terms of an LLC agreement can and should be expressed in plain English. This is important for many reasons, but two of the most important are these:

• The most important function of an LLC agreement is to record the deal in an accurate, comprehensive and legally binding manner. However, its second-most important function is to serve as pre-formation teaching document that will give all of the prospective members a clear idea of their rights and duties as signatories to the agreement. You can't fulfill this function in legalese; you've got to do it in English.

• The third most important function of an LLC agreement is to serve as a post-formation user's manual for the LLC in question. This function, too, requires the use of English.

At least two-thirds of the LLC agreements I'm asked to review are replete with "whereas's," "hereinbefore's" and other ugly legalisms and archaisms that violate the plain-English rule.

6) Unreadable, unnecessary clutter. Most of the key issues in an LLC deal should be addressed in the body of the LLC agreement. However, all key issues that require highly customized or detailed treatment - as is often the case, for example, with buy-sell arrangements and contributions of non-cash property or services - should be addressed in separate exhibits, each of which should normally include one or more concrete examples. The inclusion of this type of detailed material within the body of the agreement rather than in exhibits will usually have the effect of hopelessly cluttering the agreement, and this clutter will dull readers' minds to the point where they have trouble focusing on even the most basic agreement terms. In at least half of the LLC agreements I'm asked to review, I see this clutter problem.

7) LLC agreements that don't flow. The provisions of a well-drafted LLC agreement, like the paragraphs of a well-drafted essay, should be grouped logically and follow a logical sequence. In general, they should contain, in more or less this order: (i) one or two preliminary sections, (ii) three or four sections of financial terms, (iii) a detailed section on member dissociations and related matters, (iv) sections on sales and other transfers and issuances of membership rights, (v) sections on voting and management issues, (vi) fiduciary duties, and, finally, sections on (vii) dissolution, (viii) dispute resolution and (ix) boilerplate matters.

John M. Cunningham is of counsel at Ransmeier & Spellman, P.C., in Concord. He publishes a free monthly newsletter on LLC law and tax. To subscribe, visit www.llcformations.com.

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