Suppose you’re starting a business and forming a limited liability company (LLC) in Nevada. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
An operating agreement is significant if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need an Operating Agreement
A smartly drafted operating agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The operating agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. An operating agreement also defines how decisions and member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Without an operating agreement, Nevada laws will apply by default, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Nevada Operating Agreement Include?
The Nevada Operating Agreement outlines the internal processes of an LLC in the state. To optimize governance and foresee potential dilemmas, it’s essential to familiarize oneself with its chief elements.
- Each member’s rights and responsibilities: Specify the duties and roles of each member, ensuring that all obligations align with Nevada’s statutory requirements and any specific benefits the state offers to LLC members.
- Capital contribution requirements for each member: Clearly state the amount or value of initial contributions and any future capital calls. Nevada law allows members to contribute property, cash, services rendered, or a promissory note.
- Procedures for adding and removing members: Comply with Nevada’s provisions on how new members can join and how existing members can exit or be removed.
- What happens when a member sells their interest, becomes disabled, or dies: Nevada allows flexibility in this area, but it’s crucial to detail processes for transfer or buyout of membership interests.
- Conditions under which a member might become bankrupt or insolvent: Define how the LLC will handle a member’s bankruptcy or insolvency, keeping in mind Nevada’s protective stance toward LLC assets in personal bankruptcy situations.
Management and Voting:
- Management structure and roles of members: Nevada allows for member-managed or manager-managed LLCs. Be explicit about which structure you’re adopting and delineate roles.
- Voting rights of each member: Typically based on the proportion of ownership or capital contribution, but it can be adjusted as seen fit by the members.
- Rules for meetings and voting: State how often meetings will occur, what constitutes a quorum, and any special meeting protocols.
- Rules for managing potential conflicts of interest among members: In Nevada, the fiduciary duties of members can be altered or eliminated in an operating agreement, but it’s essential to be explicit about these changes.
- Allocation of profits, losses, and distributions: Specify the method—whether based on capital contributions, ownership percentage, or another defined metric.
- Provision for periodic financial audits or reviews: Given Nevada’s business-friendly environment, periodic audits can provide transparency and trust among members.
- Tax treatment of the LLC: By default, an LLC has a pass-through tax status, but members can opt to be taxed as a corporation.
Changes and Amendments:
- Process for amending the operating agreement: Clearly outline how proposals, discussions, and ratifications of changes will occur.
- Guidelines for company management during transition events: Detail how the company will handle significant transitions, like the departure of a founding member.
- Conditions under which the LLC might be sold or merged: Nevada allows for flexible merger provisions, so set forth the necessary approval processes and any other conditions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Given the potential for costly litigation, many LLCs prefer to include arbitration or mediation clauses.
- Guidelines for non-compete and confidentiality agreements: Ensure these align with Nevada’s stance on non-competes, which generally favors enforceability as long as terms are reasonable.
- Provision for indemnification and limitation of liability: Specify any additional protections for members beyond what Nevada law provides.
Record Keeping and Communication:
- Details about record keeping requirements: While Nevada doesn’t have stringent record-keeping requirements for LLCs, defining where and how records are kept ensures transparency and efficiency.
- Guidelines for how company-related decisions will be documented or communicated: This is crucial for maintaining clarity and a historical record of decision-making.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Nevada does not require LLCs to specify a purpose, but it can provide clarity for members.
- Identification of the registered agent and office: Every Nevada LLC must have a registered agent in the state.
- Procedures for dissolving the LLC: Align with Nevada’s dissolution requirements, including filing Articles of Dissolution.
- Procedures for winding down or liquidating the company’s assets: State the steps in accordance with Nevada law, ensuring the appropriate distribution of assets and settling of debts.
How to Draft a Nevada Operating Agreement
You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
Consider having an attorney draw up your operating agreement if your business has multiple members. An attorney will ensure that all bases are covered, and all members’ rights are protected. They can also include language that is specific to Nevada laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Articles of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s articles of organization. The articles of organization officially form your LLC with the state and include no information about member roles or financial interests.
Also, the articles of organization are filed with the state and part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your Nevada Operating Agreement Up to Date
It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is entirely up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in Nevada, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change.
You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC operating agreement need to be notarized in Nevada?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a Nevada LLC does not have an operating agreement?
Nevada default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.