Does My LLC Need An Operating Agreement?

Plain and simple . . . the New York Limited Liability Company Law requires at a minimum, that all LLCs adopt an operating agreement within 90 days of filing their articles of organization. However, despite this requirement, many LLCs operate on a daily basis without an agreement. While the NY LLC law is strict in its requirements, it is not explicit as to whether a business faces any fines or penalties for failure to adopt an operating agreement. Given the lax enforcement of these provisions, businesses continue to run without fulfilling this simple requirement.

Among the many benefits of adopting an operating agreement, a major reason for doing so is to maintain the legitimacy of the business. One of the main functions of an LLC is to limit the liability of its owners/members. In the event of a lawsuit, the LLC will protect the members from being held personally liable for any debts, claims, etc. In order to maintain that limited liability structure, the owners must carry out the business as a separate entity from themselves. This means, among other things, opening bank accounts in the name of the business, purchasing insurance and keeping personal and business assets separated. Overall, adopting an operating agreement strengthens the legitimacy of the business and protects against claims that the business is merely a shell company used to shield the members’ assets from creditors.

According to Section 417 of the NYLLC law, the operating agreement can contain any provisions relating to “(i) the business of the limited liability company, (ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents . . .” Think of an operating agreement as a contract between the members that decides how the company will be run and who makes the day-to-day decisions. Depending on the complexity of the business and number of members, an operating agreement can range anywhere from 10 — 100+ pages. Since the members are owners of the business and responsible for creating the operating agreement, they get to decide the contents of that document.

Among the various matters that are covered in an operating agreement, some examples include: who manages the daily activities of the business, how must matters be decided amongst members - unanimously or by majority vote, what happens if a member leaves, how will profits and losses be divided, under what circumstances must the business be dissolved, what is the purpose of the business, and who is responsible for filing taxes on behalf of the business, etc. Again, given the latitude afforded to members, these agreements can be straightforward and to the point or extremely complex and convoluted.

Although you can find sample operating agreements on the internet, it’s certainly worth consulting with an attorney to help figure out what type of agreement works best for your business. Whether you choose to download a free template online or work with an experienced attorney, protect yourself and your business by making sure that your LLC has an operating agreement.

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.