An LLC Operating Agreement is a legal document that outlines the ownership, management, and operation of a Limited Liability Company. Although not required by law, an Operating Agreement is highly recommended for all LLCs, as it provides clear guidelines for how the business will be run and how decisions will be made. Most states, including New Jersey, have information available online regarding LLC Operating Agreements. Here are several key elements that every operating agreement should have:
Outline the basic information
What is the name of your LLC? When was it formed? Why was it formed? Where is its principal place of business? Include these basic details about your company.
Define the ownership structure of the LLC
Who are the members? What percentage of the business does each member own? Are there different tiers of membership interests? Can all members vote on the operations, or are voting rights restricted to a particular class of members. Identify the initial members and their respective ownership percentages, and define voting rights.
Establish the management structure of the LLC
Who is the manager? Will the LLC be managed by 1 or more members, or by a professional manager? Define the roles and responsibilities of the members, and any managers or officers who will be responsible for running the day-to-day operations of the business.
Define the decision-making process for the LLC
How do major decisions get made? What decisions need membership approval? What percentage of the membership, if any, needs to approve major decisions? Outline how major decisions will be made, such as those related to investments, major purchases, or changes in ownership structure.
How should disputes be resolved? Litigation? Arbitration? Mediation? A mixture of all three? Give some thought to the types of disputes that might arise and the methods for resolving them.
Establish rules for distributing profits and losses
This includes outlining how profits and losses will be allocated among the members, and any provisions for reinvesting profits back into the business.
The agreement should outline the capital contributions of each member, including any obligations for additional capital contributions in the future. What happens if additional capital is needed and 1 or more partners is unable or unwilling to make the investment?
Transfer of Ownership
The agreement should describe the process for transferring ownership interests, including any restrictions on transferring ownership interests to outside parties. Consider what happens when a partner retires, dies, goes bankrupt. Consider including a right of first refusal.
The agreement should describe the procedures for dissolving the LLC, including the distribution of assets and the obligations of the members.
The operating agreement should specify the governing law that will be used to interpret and enforce the agreement.
Have the Operating Agreement reviewed by a Legal Professional
Have the agreement reviewed by a legal professional. It is important to make sure that your Operating Agreement is in compliance with state laws and covers all important issues related to your business.
Additional provisions to consider include a buy-sell provision and method of valuation. Consider how taxes are paid, and how profits and losses are to be allocated among the partners. Address any other important issues that may arise, such as the transfer of membership interests, the death or disability of a partner, restrictions on competition, etc.
Operating Agreements can be highly customized to fit the specific needs and goals of each LLC. Therefore, it’s a good idea to work with a legal professional who can help you draft an agreement that is tailored to your business. Additionally, it’s important to keep your Operating Agreement up to date as your business grows and evolves.
If you need an Operating Agreement for your business, contact us today.