When forming an LLC there are different documents that are required in order to form an LLC. One of the most important documents is the operating agreement. Although it is not a legally required document, it is a set of rules written by your LLC. It allows your LLC to maintain limited liability and governs how the LLC is run in the eyes of the law.
Why Do You Need an Operating Agreement?
The operating agreement of an LLC includes rules and regulations, as well as the operational structure of the LLC. It can also help to solve disagreements that are outside the general scope of liability law. If your LLC does go to court, it can help to protect the interests of the LLC, keeping duties straight, and leaving no question as to how the LLC should be run.
There are many reasons why an operating agreement is essential. For example, operating agreements are often used to clarify verbal agreements and settle disagreements in court. The operating agreement can also help protect the facts of the rules of the LLC in the eyes of a court, should a disagreement get to that level. This also provides protection to the limited liability status of the business.
Information to Include in an Operating Agreement
Members Ownership and Structure
In an LLC, owners are referred to as members. Each member of an LLC will have a different percentage of ownership, but this is not necessarily correlated with how much each member has paid. All of this should be outlined in the operating agreement to make it clear for all.
The management structure should also be outlined in the operating agreement as well. You can choose to have your LLC be member-managed or manager-managed. If an LLC is manager-managed, salary and election information should be included in the operating agreement.
Because members and managers each have responsibilities, these need to be outlined in the operating agreement. It will leave no question as to who is responsible for what.
Designation of Parties
An operating agreement should have the names and addresses of members as well as managers, and the registered agent. A registered agent is a person (or entity) that has an address in the state of New Mexico. Their name and information should also be in the operating agreement.
Because an LLC is different from a corporation, profits are distributed as outlined in the operating agreement. It is not based on shared but based on however you decide it to be.
Procedures of transferring interest
When an LLC is dissolved all the assets must be liquidated or transferred. How these assets are distributed needs to be clearly stated in the operating agreement.
Connections to the Articles of Organization
The articles of organization are used to form an LLC, so it is important to make connections from this document to the operating agreement.
Duration of the LLC
Although most LLCs are formed to exist until dissolved, some LLCs are conditional. They can also be defined for a specific task or duration.
General LLC Information
The address, place of business, and purpose of business should be defined in the operating agreement.
Capital Contributions and Voting
Businesses that rely on capital such as investments or donations, should outline this in the operating agreement. In some situations, an LLC may wish to ban the ability to acquire more capital in the business, because it might change the percentage of interest. If it is allowed, it should be properly explained.
Another aspect of the operating agreement is voting. Most LLCs will hold meetings and require a vote to change practices. The operating agreement should outline how the meetings occur, and how many votes each member has.
Process for Dissolution
Should an LLC need to be dissolved, there must be provisions for this. If a member chooses to withdraw, or the LLC wants to completely dissolve, there must be procedures outlined and in place.
Death of a Member
The same can be said if a death of a member occurs. Whether this involves a spouse acquiring their shares, or other members purchasing their interest.
How to create an LLC Operating Agreement
Forming an LLC does not require an operating agreement, but it is generally a good idea. Drafting an operating agreement with a lawyer will help you maintain limited liability in the eyes of the law. If you do not have a properly drafted operating agreement, your LLC will automatically be governed by New Mexico state law. This is why it is essential to form an LLC with the help of a lawyer.