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Operating Agreement Guide

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☎️ If you have any questions, schedule a call with our Fractional Concierge
 

📜 Operating Agreement Summary & Points to Discuss


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Highlighted areas are terms your group should discuss and confirm together. Based on your group’s answers, the Operating Agreement drafted will reflect any alterations or changes. Please mark up all answers and changes in red. Please confirm term statements in each section with an [ x ] like below: ✅ Group has confirmed the above [ x ] Anything not answered will default to the standard operating agreement language.
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ARTICLE 1: DEFINITIONS
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Definitions of terms used in the operating agreement.
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ARTICLE 2: ORGANIZATIONAL MATTERS
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Organization details around the LLC, such as the purpose of the Company, no personal liability for Members and Manager, etc.
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ARTICLE 3: CAPITAL CONTRIBUTIONS; AUTHORIZATION AND ISSUANCE OF UNITS
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The main takeaways of Article 3 include:
  • Details around initial contribution and additional capital contributions based on each Member’s percentage interest in the Company.
  • Details around when a Member is considered a Defaulting Member in the event they do not contribute to capital contribution requirements.
  • Details around the option for other Members to make an advance payment for the Defaulting Member, and how they will be paid back the principal and interest.
 
Membership split: Answer question(s)
  • How does the equity/ownership of the LLC get split among the members?
    • As standard, the LLC will allocate 1,000 units divided and split equally among the capital contribution of each member. Each member’s contribution and unit split is listed in Exhibit A in the Operating Agreement.
    • For example, if Jackie contributed $20 and Joe contributed $80, the units will be split 200 and 800 respectively.
 
Additional capital contributions: These terms are standard in our Operating Agreement, however, you may keep or adjust the timelines and procedures (noted in red) to have it reflected in your Operating Agreement.
  • The manager will provide all members a written notice when Additional Capital Contribution is required. Members must pay within 14 business days their owed amount.
  • When a Member fails to pay any part of their Additional Capital Contribution for 5 business days after the initial 14 business days other non-defaulting Members will have the right to pay the unpaid funds on the defaulting Member’s behalf (a Default Advance)
  • The defaulting Member will be required to repay the Member who made the Default Advance at a rate of (lesser of the two options) (i) twelve percent (12%) per annum, compounded monthly or (ii) the maximum amount permitted by law
✅ Group has confirmed the above [ ]
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ARTICLE 4: MEMBERS
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The main takeaway of Article 4 details the Members’ rights.
 
Member voting rights: Answer question(s)
  • How is voting power allocated (select option):
    • A. Per capita basis: each member gets one vote.
    • B. Based on percentage ownership: each member's vote is weighted based on their ownership level.
 
Procedures for admitting new members [OPTIONAL]: Answer question(s)
The following questions should only be discussed if there are specific requirements for new members who join the LLC.
  • What percent of current ownership needs to approve a new member joining the partnership?
    • As standard, Fractional will admit or deny any new members as we screen and vet all our members. There is no percent approval in our Operating Agreement.
  • Are there certain financial or other qualifications that new members need to meet before being admitted to the partnerships?
    • Fractional will vet each member before they can join in on an investment together.
  • Do new members get the same voting rights as pre-existing members?
    • As standard, any new member will get the same voting rights based on their pro-rata share in the LLC.
✅ Group has confirmed the above [ ]
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ARTICLE 5: THE MANAGER
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Article 5 details Fractional as the Manager with 0% ownership interest of the LLC. This is required for Fractional to handle administrative tasks while the property is hosted on the Fractional platform and to take advantage of Fractional’s mortgage financing options.
 
As standard, Fractional will perform the administrative tasks below. Please confirm whether the LLC would like Fractional to handle each of the following while the property is hosted on the Fractional platform:
  1. Preparing and performing contracts and agreements
  1. Executing documents
  1. Expenditures
  1. Incur indebtedness less than 6 months of rental income
  1. Obtain insurance
  1. Employ professional advisors to carry out business operations
  1. Make tax elections
  1. Pay Company expenses
  1. Establish the reserve
  1. Resign as Manager
  1. Charge a pre-agreed upon Service Fee
  1. Not personally liable under any judgment of a court, debt, obligation, or liability of the Company
 
Membership with special rights: Please confirm
As standard, the Manager (Fractional) may appoint a Member as an Officer, delegating some or all of its duties, powers, and responsibilities, including its specific powers and approval rights.
  • Any officer may be removed, either with or without cause, by the Manager at any time.
  • Any officer may resign at any time by giving written notice to the Manager.
  • Any resignation will take effect on the date of the receipt of that notice or at any later time specified in that notice.
✅ Group has confirmed the above [ ]
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ARTICLE 6: MEMBER VOTING
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Article 6 details how voting is conducted and the thresholds for different proposals and decisions to pass.
 
Confirm or adjust the thresholds (noted in red) required for different decision types to pass. Approval % is based on percentage interest.
  • In order for a voting decision to be valid, at least 50% must vote within 14 days of written notice. Members may pass their vote to another member.
  • Important decisions require at least 60% of the total members voted
  • Major decisions require 70% of the total members voted
  • Critical decisions require 90% of the total members voted
 
Please confirm or modify statements for each type of decision below:
Important decisions
  1. The replacement of the Manager following the resignation or termination of the previous Manager
  1. The selection of a property manager following the resignation or termination of the previous property manager
  1. Contracts over $15,000 or a fixed term of greater than 1 year
  1. Incurrence of indebtedness greater than 6 months of rental income
  1. Increasing the reserve
  1. Approval of final terms to sell the Property
 
Major decisions
  1. Incurrence of indebtedness where Property is pledged as collateral
  1. Termination of the property manager
  1. Any confession of a judgment against the Company, or execution or delivery of any general assignment of assets for the benefit of creditors of the Company
  1. Any decision to undertake or to settle any legal actions affecting the Company and involving potential legal liability to the Company
 
Critical decisions
  1. Removal of Manager
  1. Removal of Officer
  1. Determination to list the Property for sale and select a listing price
  1. The merger, consolidation, winding up, and/or dissolution of the Company
  1. The filing by the Company of a voluntary petition for reorganization or liquidation under any federal or state law for the relief of debtors, including bankruptcy laws, or the consent or acquiescence to the filing of any involuntary petition for liquidation or reorganization under any federal or state law for the relief of debtors, including bankruptcy laws
  1. The entry into, preparation, and performance of any contracts, agreements, and other undertakings that have not been vetted or given preliminary approval by the Manager
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Members have full responsibility over their decisions. Manager has the right to take care of urgent matters without seeking the consent of the Members.
✅ Group has confirmed the above [ ]
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ARTICLE 7: ALLOCATIONS OF PROFITS AND LOSSES AND DISTRIBUTIONS
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Article 7 details how profits and losses will be allocated and distributed.
 
Profits and Losses
  • Profits will be distributed within 15 days after the end of every second calendar month (February, April, June, August, October, and December) based on the Members percentage ownership of the property.
  • Allocations of Losses are made in the following order:
    • First: to the Members in proportion based on Profits previously given to them
    • Second: to the Members in proportion to their Capital Contributions during the Fiscal Year that the Losses occurred
    • Third: to the Members in proportion to their other respective Capital Contributions, and then based on their percentage ownership.
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ARTICLE 8: TRANSFER AND ASSIGNMENT OF INTERESTS
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Article 8 details how a Member’s ownership can be transferred to others.
 
Procedures of transfer: Answer question(s)
  • What percent Vote is required of Membership Interest is required to override a Manager's decision to approve / deny a transfer?
    • As standard in Fractional’s Operating Agreement, the Manager (Fractional) has the right to approve any membership transfer and can deny with a prepared notice. However, the Members will have the opportunity to override the Manager’s decision by a 60% Vote of the Membership Interests.
  • What happens in the case of a member’s interest being transferred due to reasons other than Manager (Fractional) caused such as events including divorce or death?
    • As standard in Fractional’s Operating Agreement, the Transferee of the interest who is not approved by the Manager shall only obtain the Transferrable Interest attributable to the transferred Membership Interest, but shall have no rights as a Member including no rights to vote or otherwise participate in the management of the Company.
✅ Group has confirmed the above [ ]
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ARTICLE 9: RIGHT OF FIRST OFFER
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Article 9 details the priority for existing members to buy ownership transfers.
For example, if Vicky, Sally, and Alan are in a partnership and Alan needs to exit, Vicky and Sally get first priority to buy Alan’s shares before Alan’s shares can be offered to someone else.
 
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ARTICLE 10: ACCOUNTING, RECORDS, REPORTING BY MEMBERS
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Article 10 details how the Manager will maintain books and records, reports, bank accounts, and accounting.
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ARTICLE 11: DISSOLUTION AND WINDING UP
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Article 11 details the dissolution of and winding up of the Company.
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ARTICLE 12: INDEMNIFICATION AND INSURANCE
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Article 12 details around indemnification of the Company, Manager, and Members and the Company’s ability to purchase and maintain insurance.
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ARTICLE 13: DEFAULT
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Article 13 details how a Member is considered defaulting (nonpayment of Additional Capital, noncompliance with the Agreement, bankruptcy, fraud), their liabilities in the event of a default, and non-defaulting Members’ rights to buy out a defaulting Member.
 
Member Liability for Failure to Perform / Continuing Default: Please confirm
  • In the event of a default by a Member, the LLC has the right to reduce and set off any outstanding debts of the Member. The defaulting Member will not be entitled to any further payments and distributions.
  • While the Event of Default is occurring and continuing, the Defaulting Member will have no right to participate, approve, control, and vote in the affairs of the Company.
 
Events of Default: Confirm or adjust the timelines and procedures (noted in red)
  • A member has 30 days to comply with obligations of Agreement after they are given notice before the event is considered a default. This includes contributing additional funds when necessary.
 
Defaulting Member Buy-Out: Confirm the timelines and procedures (noted in red)
  • When there is an Event of Default, current members will have the option to buy out the Defaulting member’s ownership based on the fair market value of the Property.
✅ Group has confirmed the above [ ]
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ARTICLE 14: INVESTMENT REPRESENTATIONS
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Article 14 details investment representations and real estate ownership and investment risks.
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ARTICLE 15: MISCELLANEOUS
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Article 15 details dispute resolution and arbitration, and other miscellaneous items.
 
Fractional has a dispute resolution escalation process in place as follows:
A. Negotiation: members settle conflict internally and reach an agreement through discussion
B. Meditation: select an independent third-party mediator to assist the members in resolving conflict
C. Arbitration: formal court process and confidential arbitration by Judicial Arbitration and Mediation Service