LOS ANGELES—For good reason, one of the most common structuresfor real estate joint ventures is the limited liability company.After all, it is one of just a few alternatives that provides anenticing blend of limited liability and structural flexibility.Like all joint ventures, though, the LLC is not without pitfalls.The typical “constitution” for an LLC is its “OperatingAgreement”. There are several key provisions in a typical LLCOperating Agreement which, if not carefully considered, can rise uplater to wreak havoc. Three of the most important provisionsare:

Distributions: These provisions typicallydetail the “waterfall” pursuant to which LLC profits are to beallocated. Because they can be somewhat challenging to draftwithout ambiguities, if they don't accurately reflect the members'intent, the potential for disagreement among the members increasesexponentially—after all, the members invest in order to receivecash flow. If they are not carefully married to the taxprovisions in the Operating Agreement, they can give rise to“phantom income” - income on which the members must pay tax eventhough they have not actually received funds from theLLC.

Management, Major Decisions and Deadlock: Theseprovisions describe how the LLC will be managed (member-managed ormanager-managed) and specify the extent of the manager'sauthority. Typically, an Operating Agreement will include alaundry list of major decisions which cannot be made withoutunanimous or majority consent of the members. When theseprovisions are not well thought out, they provide the basis for twocommon issues: (1) if the authority of the manager is notclearly defined, then members and third parties such as lenders andtitle companies are much more likely to question the validity ofthe manager's actions on behalf of the LLC, and (2) how to resolvesituations in which the members don't agree on major decisions(i.e., deadlock). This second issue has become farmore prevalent in the last few years because equity members havebeen demanding more control in the decision making process. The absence of a satisfactory solution to deadlock can paralyze theLLC.