Suppose you’re starting a business and forming a limited liability company (LLC) in New Mexico. 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, New Mexico 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 Mexico Operating Agreement Include?
The New Mexico Operating Agreement is the keystone for the internal workings of an LLC in the state. Understanding its primary components is key to ensuring efficient governance and averting potential conflicts.
- Each member’s rights and responsibilities: Define roles, tasks, and duties for each member. New Mexico provides flexibility, allowing members to detail their specific expectations.
- Capital contribution requirements for each member: Enumerate the monetary or equivalent value each member contributes, typically dictating their ownership percentage.
- Procedures for adding and removing members: New Mexico typically requires unanimous consent for adding members unless the operating agreement specifies otherwise.
- What happens when a member sells their interest, becomes disabled, or dies: Outline succession plans or buyout procedures to safeguard the LLC’s continuity.
- Conditions under which a member might become bankrupt or insolvent: Clarify procedures and outcomes if a member faces financial difficulties.
Management and Voting:
- Management structure and roles of members: Indicate if the New Mexico LLC will be member-managed or manager-managed, and describe the duties linked to each role.
- Voting rights of each member: Often tied to ownership percentages but can be altered based on the members’ wishes.
- Rules for meetings and voting: Specify meeting frequency, notification protocols, and quorum requirements for decisions.
- Rules for managing potential conflicts of interest among members: Establish ethical standards and procedures for potential conflicts.
- Allocation of profits, losses, and distributions: Standardly based on ownership, but the agreement can dictate unique terms.
- Provision for periodic financial audits or reviews: Define the necessity and frequency of financial scrutiny.
- Tax treatment of the LLC: While LLCs are by default pass-through entities, members can opt for a different tax classification if it suits them.
Changes and Amendments:
- Process for amending the operating agreement: Detail the methods and necessary votes or consensus to make changes.
- Guidelines for company management during transition events: Offer guidance on navigating substantial company alterations or challenges.
- Conditions under which the LLC might be sold or merged: Clarify the scenarios and processes for major structural changes.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Encourage mediation or arbitration to avoid costly legal battles.
- Guidelines for non-compete and confidentiality agreements: Protect the LLC’s intellectual and business assets.
- Provision for indemnification and limitation of liability: Specify protections for members against certain claims, consistent with New Mexico’s regulations.
Record Keeping and Communication:
- Details about record keeping requirements: While New Mexico doesn’t impose stringent record-keeping mandates, the agreement can solidify desired practices.
- Guidelines for how company-related decisions will be documented or communicated: Ensure members remain informed and aligned.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clarify the LLC’s primary goals and actions, which can help guide decision-making.
- Identification of the registered agent and office: As required by New Mexico, denote who will receive legal papers and where.
- Procedures for dissolving the LLC: Align with New Mexico’s dissolution procedures, ensuring a smooth transition if the LLC ends its operations.
- Procedures for winding down or liquidating the company’s assets: Offer steps to ensure fair asset distribution if the LLC closes.
How to Draft a New Mexico 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 Mexico 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 New Mexico 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 amend the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in New Mexico, 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 New Mexico?
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 Mexico LLC does not have an operating agreement?
New Mexico default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.