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Springing Member LLC

By IncNow | Published October 19, 2013

Required by lenders in special financing transactions, this is a Single Member LLC operating agreement which contains a second non-equity special member (an unrelated party) whose primary function is to “spring into action” should the single member go into bankruptcy, or other related triggers. The LLC operating agreement restricts the sole-equity member’s ability the LLC should the single member be unable to operate the entity. This is often required to be the form of entity, should the lender repackage or bundle the loan subject to certain restrictions to be sold as a marketable security. The primary purpose is to avoid a the assets of the LLC from becoming part of its member’s bankruptcy estate. These LLCs are usually used in loans over $4 million. They also require attorney opinion letters from counsel where the property is located and in the state of incorporation. Lenders also require these be Delaware LLCs.

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When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go