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Operating Agreement

An “Operating Agreement” refers to a binding legal document that outlines the structural and management regulations of a Limited Liability Company (LLC) that may be set up to take advantage of Opportunity Zone tax benefits.

The Tax Cuts and Jobs Act of 2017 introduced Opportunity Zones to spur investment in distressed areas by providing significant tax incentives to investors. These investments are typically made through a Qualified Opportunity Fund. If an LLC is set up to operate as a QOF, the Operating Agreement would detail how the LLC will function, both as a standard business entity and in its capacity to meet QOF requirements.

Specifically, the Operating Agreement might include:

  1. Membership Details: Lists members, their initial contributions, and percentage ownerships.
  2. Management Structure: Specifies whether the LLC is member-managed or manager-managed.
  3. Capital Contributions and Distributions: Details about how and when capital contributions can be made and how distributions will be handled, especially in the context of potential tax benefits or penalties related to the QOF.
  4. Allocations of Profit and Loss: Describes how profits and losses are shared among members.
  5. Compliance with QOF Rules: Provisions to ensure that the LLC will adhere to all the requirements set out for Qualified Opportunity Funds, like investing at least 90% of its assets in Opportunity Zone property.
  6. Dissolution and Exit Provisions: Details about when and how the LLC can be dissolved, which is especially important given the long-term investment horizon associated with Opportunity Zone benefits (up to 10 years for the maximum tax benefit).
  7. Other Provisions: Any other standard or special provisions that the members agree upon, which might include dispute resolution processes, reporting requirements, member responsibilities, etc.

For anyone setting up a QOF, it would be prudent to consult with legal and tax professionals to ensure compliance with all Opportunity Zone regulations and to draft an Operating Agreement that protects all parties’ interests.