If you’re looking to form a business in Nevada, then it’s important that you understand what an operating agreement is and how to create one. Creating any type of business is often a complex process that involves filing the correct paperwork and ensuring various obligations are being met. Operating agreements are just a part of this process, so it’s vital that you take the time to learn about them.
With all of that said, we’re going to look into what a Nevada operating agreement is, why it’s important when creating a business and how to create an LLC operating agreement in Nevada.
What is an operating agreement?
An operating agreement is a legal document that acts as a contract when forming a limited liability company (LLC). It’s a useful piece of information that helps outline the rules, procedures, and provisions that establish how the business functions internally.
An operating agreement works to ensure that the LLC operates in a different way than other types of business, like a sole proprietorship, as it separates the business owner’s own assets from those of the business. In order to form an LLC, you’ll need to create a written operating agreement.
At its core, operating agreements are a useful way to outline how the internal operations and processes of the LLC are going to be handled, with the specific needs of the business (and its owners) in mind.
Why do you need an operating agreement in Nevada?
Some states require all LLCs to establish an operating agreement, although this isn’t the case for Nevada. With that said, they’re still an invaluable resource for LLCs for a number of different reasons. So even if it isn’t a legal requirement, operating agreements are important because they:
- Let you have more control over how the business functions as you aren’t relying on what’s outlined in Nevada state law. State laws are the default rules that LLCs use if they don’t have an operating agreement, and they aren’t always beneficial. For example, some state rules outline that all members share profits equally, regardless of the member’s capital investment.
- Operating agreements also help to protect the limited liability part of an LLC. Without an operating agreement in place, owners of LLCs could be personally liable if it appears that they’re operating as sole proprietors or as part of a partnership.
- Finally, operating agreements are a useful way to bring more transparency and clarity into how the business functions. This is helpful because it keeps all members in the picture, which helps iron out any disputes or issues before they become more serious.
What information do you include in an operating agreement?
Operating agreements are designed to encompass all of the internal operations of an LLC, so it’s important that you include all of the aspects of the business when drafting it. If you omit certain aspects of the workplace operations, then all members of the LLC are at risk of liability, so it’s important that you get it right.
Due to the comprehensive nature of these agreements, it’s often difficult to draft operating agreements on your own. So it’s generally a good idea to bring in a professional, such as a specialist lawyer, to help you draft your operating agreement. They can help you navigate all of the complexities and ensure you don’t miss any aspect of the business.
Although many of the details found in an operating agreement will depend on the nature of the business, there are a number of more general details to include, such as:
- Contact information (name and address) and titles for all members of the LLC
- Ownership percentage figures
- Individual member roles, rights, and responsibilities
- Levels of liability and powers of members and managers
- Profit and loss levels
- Rules around buying and selling
- Details about the procedure for dissolving the LLC
- Information about how meetings are established
- Procedures for transferring interest
- Articles of organization
- Certificate of organization
This isn’t an exhaustive list by any means, and what you include in the operating agreement will vary depending on the nature of your LLC. Some other provisions you might want to consider implementing into your operating agreement might include:
- Breakdowns of additional capital contributions and investments
- Voting rights and percentages
- Management definitions within the LLC
- Transfer of interest
- Processes for the death of a member
How to create an LLC operating agreement in Nevada
In order to form your LLC in Nevada, it’s strongly advised that you create an operating agreement to outline how your business will operate. As we’ve discussed, this can be a complex process that requires an in-depth understanding of LLC legislation, state laws, and how your business will function. Although you can do this yourself, it’s always a good idea to seek legal advice from LLC lawyers who can help you create a comprehensive operating agreement for your LLC.
To give you an idea of the steps required to create an LLC operating agreement in Nevada, take a look at the steps below:
Define the ownership structure and percentages for your LLC
The first step of creating an LLC operating agreement is by outlining the ownership structure and percentages. This includes defining all of the members that are involved in the LLC, so be sure to include their full name, address, and title.
With the basic information about members completed, the next step is breaking down the ownership structure and percentages for each member of the LLC. Most LLCs have more than one member to help invest in the business and ensure it runs smoothly. Each member will have their own percentage of ownership, usually assigned by looking at the amount of time, resources, or finances each member has contributed. This all needs to be defined before it goes into the operating agreement.
Outline member rights, responsibilities, and compensation
One of the primary functions of an operating agreement is that it provides a level of protection for all members of the LLC. So your operating agreement needs to outline all of the rights, responsibilities, and compensation levels for each member in your LLC. Some common details to write here include:
- Member voting rights
- Responsibilities and duties for each member
- Performance expectations and targets
- Financial rewards, salaries, and bonuses
Outline how members join or exit the LLC
An operating agreement should also give you control over how the LLC operates moving forward, which includes bringing new people into the business and creating a process for members to leave. This ensures that in the future, your LLC has a clear plan for how to let new members join and how existing members leave.
This is an important step to get right, so the more detail you can provide here the better. Think about things like how to effectively divide any ownership percentages when a member leaves, or what a new member might receive when they join.
Decide what happens if the LLC dissolves
Dissolving the LLC isn’t something you’ll particularly want to think about when forming your new company, but it’s important that you consider this situation. Establishing the right terms for dissolution ensures that you’ll have control over how it happens if it ever comes to it. Some things to consider including in this section might be:
- What happens if there is existing company debt?
- What will you do with any remaining assets in the company?
- What information to include about member rules and duties during a dissolution?
Draft a severability clause
Another thing that goes into an operating agreement is a severability clause. This helps to protect specific aspects of the agreement in case there are conflicts between your agreement and state or federal law. In essence, the severability clause outlines that if a portion of the agreement has a conflict, then the rest of the agreement is still valid. It’s an important part to include from a legal perspective.
Frequently asked questions
The best way to make an operating agreement in Nevada is to bring in the expertise of an LLC lawyer. Operating agreements incorporate some important details that focus on how your LLC will function, so if there are any legal concerns this agreement covers you. As such, it’s vital that you make it as comprehensive as possible and written in a way that’s legally sound. Without the right knowledge of both your business and the law, you’re leaving your LLC vulnerable to legal issues down the road.
If you’re forming an LLC in Nevada, you aren’t legally required to create an operating agreement. However, failing to draft your own operating agreement leaves you at risk of certain legal issues, so it’s highly recommended that you create one. Moreover, it acts as clear evidence that keeps members of your LLC on the same page. They’ll have this as a reference if there are ever disagreements about the rules, regulations, or processes of the LLC, so it acts as a useful form of protection.
There isn’t a legal requirement to have an operating agreement for your LLC if it’s a single owner LLC. However, it’s still strongly advised that all LLCs - even those with a single owner - create their own operating agreement. This is because it clearly outlines how the business operates and defines what the members within the LLC do.
Even in cases where you don’t have to divide assets or duties, operating agreements still have inherent value. For example, operating agreements act as a form of evidence that the business is a separate entity from yourself (as a sole member). Without this evidence, you might find difficulties in obtaining the primary benefit of an LLC - limited liability. So an operating agreement can ensure that you aren’t responsible for any debts or legal liabilities if they arise.