Does Your Small Business LLC Have an Operating Agreement?

New York, like many states, requires all limited liability companies to have an operating agreement, regardless of size. In New Jersey, they are not required, but they are certainly a good idea.

An operating agreement is essential to the smooth operation of an LLC because it governs the company’s financial and business decisions. For the members of the LLC, an operating agreement has several advantages. Most importantly, it provides evidence that the company is truly an LLC and not a sole proprietorship or partnership, and thereby helps shield members from personal liability. Moreover, having a written agreement in place not only helps avoid disputes, but also outlines how they will be resolved when they do arise.

In the absence of an Operating Agreement, the rights of members of a New Jersey LLC defaults to the controlling provisions of the statute- which may or may not accord with the intentions of the members.  And even though you may already have an Operating Agreement, with the passage of a revision to New Jersey’s LLC statute that became effective March 18, 2013, you may have overlooked some of the provisions that you might want to include to avoid having the statutory provisions control.

While many “standard” operating agreements are available, to gain the most benefit and make sure the members’ legal interests are protected, the contract should be tailored to meet the needs of the company. Below are a few key issues that should be addressed:

• Business activities: These provisions should address the purpose and scope of the LLC and any limitations on its operations.
• Contributions: These provisions should establish the percentage of members’ ownership and their ability or obligation to make additional contributions and the rights of non-defaulting members.
• Governance: These provisions should lay out the members’ voting rights and responsibilities as well as the day-to-day management of the LLC, such as the duties and powers of managers.  In the absence of an Operating Agreement, all members are managers with an equal say.  This could make the conduct of daily business unwieldy.
• Distribution of profits and loses: These provisions should dictate the timing, type (capital v. profits) and amount of all allocations of profits and losses.
• Members: These provisions should govern how and when members may withdraw or be admitted to the LLC. They should also address whether members may transfer their interests to trusts, family members or third parties and whether the other members will have a right of first refusal.
• Disputes: These provisions should establish procedures to resolve deadlocks, such as mediation or arbitration, and forum selection if litigated. The terms of a buy-sell agreement should also be considered for inclusion.

If you have any questions about LLC operating agreements or would like assistance drafting one for your business, please contact me, Mark Follender, or the Scarinci Hollenbeck attorney with whom you work.