This is the drafting area for the Westwoods operating agreement.

Financial Section of Westwoods Operating Agreement - Version 2.0

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Key highlights:

1. Profits and losses will be retained by the LLC for operations, maintenance and capital improvements unless owners vote otherwise.  [The so-called ‘distributions’ section.]

2. Retained profits and losses will be allocated according to the percentage ownership of the LLC.

3. The operating expense and reserve account and intended uses are described.  

4. Any future capital contributions are now covered in Section 2.

5. The corporate method of taxation will be used.  Note that any distribution will also be a taxable event at the individual level.  [The members would not report the LLC's income on their individual tax returns in the same way as we would with a pass-through taxation structure.]

6. Documentation and recordkeeping.  

Here's version 2.0 of the "Section 5: Financial Matters" section of the Westwoods LLC operating agreement.

Section 5. Financial Matters:

Intent and philosophy introduction. The LLC is designed to operate the Westwoods property for the benefit of family members.  As such, it is expected that any cash flows and profits generated by the LLC will be retained by the LLC for operating purposes, maintenance projects or improvements to the property. However, members may vote for cash distributions according to the procedure set in Section 4.  

a. Profits and Losses Allocation:

1. [Drawn from section 7.1 of LLP draft] The net income (profits) or net losses of the LLC for financial accounting and federal income tax purposes shall be determined in accordance with federal income tax principles, including the deductions for cost recovery and/ or amortization of all partnership assets and expenditures, by using a cash receipts and method consistently applied from year to year as determined by the Partnership accountants.

2. Profits and losses of the LLC shall be allocated among the members in proportion to their ownership percentages as defined in Section 2.

3. The fiscal year for the LLC ends on December 31st.

b. Distributions:

1. Any generation of profits and capital gains are expected to be retained by the LLC for operations, maintenance and reserves. 

2. The members may vote (according to the method set in Section 4) to distribute profits at any time.

3. Any profits allocated will be deducted from each participating member’s capital account.

c. Operating accounts:

1. The LLC shall maintain a separate bank and brokerage account for the management of funds related to the vacation property and investment assets.  The associated account statements will be provided upon request by any Member.

2. Collectively, these accounts will be called the Operating Accounts and be used not only for operating expenses such as maintenance, insurance, and property taxes, but also as a reserve fund for unexpected expenses and capital projects..

3. The Operating Accounts will also hold any income generated from the property, such as rent.  

d. Taxation:

1. The LLC will be classified as a C corporation, and it will file its own corporate tax return, reporting income and expenses at the entity level. 

2. [Washington does not have a state income tax on personal income, but it does have a Business and Occupation Tax. It is possible our LLC may be subject to state B&O tax.  However, there is a $56k threshold for gross income before the tax applies, so we will probably be okay.  Need to check with a CPA.]

3. The Westwoods Financial Manager may engage a certified public account (CPA) to prepare tax returns for the LLC.  

4. [this bullet is lifted from section 9.7b of the LLP draft agreement.  It basically ensures that no member will unilaterally change the tax status with the IRS.]  No Member shall file a notice with the IRS under Section 6222(b) of the Code in connection with such Member’s  intention to treat an item on such Member's Federal income tax return in a matter which is inconsistent with the treatment of such item on the LLC's Federal income tax return unless such Member has, not less than (30) thirty days prior to the filing of such notice, provided the LLC membership with a copy of the notice and thereafter in a timely manner provides such other information related thereto as the Westwood’s Financial Manager shall reasonably request.

e. Record keeping:

1. [This section is largely drawn from section 9.7c of the LLP draft agreement.]  At all times during the term of the LLC, and beyond that term if the membership deems it necessary, the member designated as the Record Keeper Manager in Section 3 shall keep or cause to be kept books of account in which each LLC transaction shall be entered fully and accurately. 

2. All LLC books of account, along with the following items shall be maintained by the Records Manager:

   1. A current list of the full name and mailing address of each member, as well as a primary email address and primary phone number for each member.  

      1. It is the responsibility of each member to ensure that the LLC records reflect accurate contact information.

   2. The capital account details for each member, as described elsewhere in this document;

   3. A copy of the LLC Articles of Organization, Certificate and all certificates of amendment thereto, together with executed copies of any powers of attorney under which any certificate has been executed;

   4. Copies of the original LLC operating Agreement and all amendments thereto;

All of these records shall be maintained in a mutually agreed upon online location accessible by all members. The Records Manager is tasked with ensuring that paper and/or electronic backups are maintained.  

3. The designated Financial Manager (FM) shall maintain the following records and documents, making copies of them available to any member upon request, at the LLC’s expense: 

   1. Copies of the LLC’s federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years;

   2. Financial statements of the LLC for the six most recent fiscal years;

   3. The LLC’s books and records for at least the current and past three fiscal years.

   4. The FM will produce and circulate an annual report that summarizes the financial position of the LLC, including investment balances and changes, operating income and expenses, and any relevant financial information.  

It is the Financial Manager’s responsibility that suitable paper and/or electronic backups of these records are maintained.

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