When you form a Limited Liability Company (LLC), there are some structural decisions to be made. It’s simple when you’re the sole member, but what happens when you have multiple members? Who is in charge of what? What happens in a dispute? Is it a member-managed, or manager-managed LLC? What would a manager (or multiple managers) be in charge of? Answering questions like these is important, and that’s why states like New York make it required for LLCs to fill out operating agreements.
What is an Operating Agreement?
An operating agreement is a written agreement between members and managers of an LLC concerning business operations and the conduct of affairs. It’s a requirement of New York law to have this agreement for any LLC you form. It outlines the financial and functional decisions of an LLC, including the rules, regulations, and provisions. It serves to govern the internal operations of the business and is tailored to the needs of the owner(s). It will contain basic information and details about the business as well as what to do in the event of a dispute.
Why Do You Need an Operating Agreement?
The main obvious reason to create an operating agreement is simply because New York law requires that you do so in order to form an LLC. There are no defined penalties for failing to accomplish this, but there are plenty of other reasons to have this written. It makes for good business practice and it sets the overall tone for how your business will operate.
Protect Your Limited Liability Status
Operating agreements provide members protection from personal liability to the LLC. Your business might otherwise resemble a sole proprietorship or partnership, which puts the limited liability status in jeopardy. Having a formal written operating agreement offers the minimum credibility your business needs.
Override State Default Rules
New York has a set of default rules in place that apply to businesses without an operating agreement. These rules are overly generalized and only barely protect your business, and sometimes they don’t match up with the same vision as the members of a business. Writing an operating agreement will override these state defaults and put the rules enforced in the hands of the members who run the entity.
Establish Percentage of Ownership
Building a business with multiple members can complicate who owns how much of the business. It’s a discussion worth having with your fellow members and agreeing on this detail ahead of time can reduce potential headaches in the future. Each member might contribute a different element to the business and therefore be entitled to a certain percentage of the profits. Different members may limit how much they are willing to invest and there should be an agreed-upon value to what everyone brings to the table.
Proof of Ownership
Since an official operating agreement contains certain details on how the business is run, it will also serve as a legal document proving who owns how much of the company. If you’re trying to protect your private information, then you will want to reduce how much you make public in an annual report or Articles of Organization you submit to your state. An operating agreement is usually an internal document that does not need to be disclosed publicly, and your personal information is more protected that way.
Information to Include in an Operating Agreement
When you form an LLC with us, we’ll help draft an operating agreement for your single or multi-member LLC. Since every business is unique, there truly is no single version of an operating agreement that fits all needs. There are a few common questions that should be answered first. In order to draft the document, we’ll need some key information:
Manager or Member-Managed
When you create your LLC in New York, you’ll want to determine whether it is managed by members of the company or by one or more managers. This will happen during the Articles of Organization submission step of forming an LLC. We can help figure out which of these options works best for you.
If you’re a single-member LLC, this one is pretty simple. It becomes more complicated with more members. Include in the operating agreement how many members there are, and you’ll need official guidelines on what percentage of the business each person owns, and how much payout they receive based on the profits earned.
Knowing who owns what percentage of the company might help define who has what responsibility. Make clear what’s expected with each member and what to do in the event of a dispute. Having these in place ahead of time will help your business maintain structural integrity.
Procedures for Transfer of Interest
If one member wants to take on more responsibilities, or if they want to transfer what they own to another member, it’s important to have a procedure in place to officially transfer ownership of the company.
How to Add or Remove Members
Related to the previous point, in the event a member wants to drop out entirely, or a new member is interested in joining the company, you should have detailed information on how to include new members or remove old ones.
Dissolving the Business
New York doesn’t have any default protocols for dissolving a business. If you are inactive long enough you may accrue fees and taxes. Include in your operating agreement how or when to dissolve your business when you’ve decided it’s finished.
How to Create an LLC Operating Agreement
In order to create an operating agreement you’ll need to include details involved with forming an LLC, including the name of the business, the names and signatures of all members, and the purpose and duration of the business at hand. Entering into an operating agreement must happen before, during the formation of, or 90 days after your LLC is formed.
Include the name of your LLC in the operating agreement as well as the name and address of your registered agent.
Include every owner’s name and signature. Also include information to keep track of who invested what and when.
Establish which member is in charge of what, how many responsibilities they have, and what happens in the event of an internal conflict.
Describe the nature of your business and the product or service your business is dealing with. It’s a good idea to include a vague description with your purpose in case you plan on expanding your business services in the future.
Determine whether you have a long term or short term business strategy, and think about how long your business might last. If you intend to have a perpetual duration, then your business can last indefinitely.
How a Business Lawyer Can Help Write an Operating Agreement
A business lawyer is uniquely equipped with the skills to manage all the information you need to start an LLC. Form a business entity with us and we’ll provide you with an operating agreement as part of our “Start a new Company” service! Contact us today for a free consultation!