If you’re starting a business and forming a limited liability company (LLC) in New Jersey, 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, New Jersey 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 New Jersey Operating Agreement Include?
The New Jersey Operating Agreement provides a structure for the inner workings of an LLC in the state. Recognizing its fundamental components ensures effective management and prepares for potential disputes.
- Each member’s rights and responsibilities: Detail the specific obligations, duties, and expectations for each member within the context of New Jersey’s regulatory environment.
- Capital contribution requirements for each member: Specify the monetary or non-monetary value each member is expected to contribute to the LLC.
- Procedures for adding and removing members: Ensure that these procedures are consistent with New Jersey’s statutory requirements. Mention any supermajority or unanimous approval needed for such actions.
- What happens when a member sells their interest, becomes disabled, or dies: Establish a clear process, possibly incorporating buy-sell agreements or specifying how the member’s heirs will be addressed.
- Conditions under which a member might become bankrupt or insolvent: Determine the implications for the member’s stake in the LLC and any protections for the LLC itself.
Management and Voting:
- Management structure and roles of members: New Jersey allows both member-managed and manager-managed structures. Decide which best suits your LLC and define the roles accordingly.
- Voting rights of each member: Typically, these rights are proportional to a member’s stake in the LLC, but you can define alternative arrangements if desired.
- Rules for meetings and voting: Set quorum requirements, notice periods, and other procedural elements, keeping in mind any state-specific requirements.
- Rules for managing potential conflicts of interest among members: Outline steps to handle conflicts in a way that ensures transparency and fairness.
- Allocation of profits, losses, and distributions: Describe the methodology—often based on capital contribution but can be defined otherwise.
- Provision for periodic financial audits or reviews: Even if not mandatory, regular audits can ensure transparency and trust among members.
- Tax treatment of the LLC: By default, LLCs are pass-through entities for tax purposes, but members can elect different treatments. Consult a New Jersey tax advisor for best practices.
Changes and Amendments:
- Process for amending the operating agreement: Define the voting percentage required for amendments—whether a simple majority, supermajority, or unanimous vote.
- Guidelines for company management during transition events: Describe management continuity in scenarios like a member’s departure or the onboarding of new members.
- Conditions under which the LLC might be sold or merged: Clarify the steps and member approvals required.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider requiring arbitration or mediation before court action to resolve member disputes. This can save time and resources.
- Guidelines for non-compete and confidentiality agreements: Detail the scope, duration, and geographic limitations, ensuring they align with New Jersey’s legal standards on enforceability.
- Provision for indemnification and limitation of liability: Describe protections for members against certain liabilities or lawsuits, consistent with New Jersey law.
Record Keeping and Communication:
- Details about record keeping requirements: New Jersey mandates certain records be maintained. Specify where and how these will be kept and member access rights.
- Guidelines for how company-related decisions will be documented or communicated: Set communication standards for consistency and clarity.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While New Jersey doesn’t mandate a strict purpose clause, it can provide clarity for the LLC’s direction.
- Identification of the registered agent and office: New Jersey requires this information for service of process. Ensure the registered agent is always reachable at the provided address.
- Procedures for dissolving the LLC: Specify steps consistent with New Jersey’s dissolution requirements, including settling debts and distributing remaining assets.
- Procedures for winding down or liquidating the company’s assets: Ensure a clear, fair process for liquidation that abides by state requirements.
How to Draft a New Jersey 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 New Jersey laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Formation vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of formation. The certificate of formation officially forms your LLC with the state and includes no information about member roles or financial interests.
Also, the certificate of formation is filed with the state and is part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your New Jersey 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 New Jersey, but the wise entrepreneur would never do business without one. It’s critical to your future. 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 New Jersey?
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 New Jersey LLC does not have an operating agreement?
New Jersey default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.