Suppose you’re starting a business and forming a limited liability company (LLC) in New York. In that case, you must adopt a written operating agreement even though you don’t file it with the state.
Your operating agreement can be entered into before, at the time of, or within 90 days of filing your articles of organization and will become effective once your LLC is formed.
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 York 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 York Operating Agreement Include?
The New York Operating Agreement provides a structured framework for the inner workings of an LLC within the Empire State. Grasping its essential inclusions is pivotal for effective business governance and preemptively handling potential conflicts.
- Each member’s rights and responsibilities: Clearly delineate each member’s duties, powers, and expected activities in accordance with New York’s LLC laws. This often includes participation in the decision-making process and the management of the company.
- Capital contribution requirements for each member: Specify the amount and form (e.g., cash, property, services) of each member’s contribution. This establishes the basis for profit sharing and voting power.
- Procedures for adding and removing members: New York law requires certain formalities. Decide whether you’ll need unanimous consent or another mechanism to add or remove members.
- What happens when a member sells their interest, becomes disabled, or dies: Address buy-sell provisions, potential rights of first refusal, and any insurance considerations.
- Conditions under which a member might become bankrupt or insolvent: Discuss dissociation or potential asset protection steps.
Management and Voting:
- Management structure and roles of members: New York allows member-managed or manager-managed LLCs. Detail the management hierarchy and roles, if any.
- Voting rights of each member: Typically based on the proportion of capital contributions but can be adjusted as members see fit.
- Rules for meetings and voting: Stipulate the frequency, notice prerequisites, and quorum requirements. Indicate if decisions require majority, supermajority, or unanimous consent.
- Rules for managing potential conflicts of interest among members: Establish ethical guidelines and procedures for handling and disclosing conflicts.
- Allocation of profits, losses, and distributions: Default is usually based on the proportion of capital contributions unless specified otherwise in the operating agreement.
- Provision for periodic financial audits or reviews: If required, detail how often they will occur and who will conduct them.
- Tax treatment of the LLC: By default, LLCs are pass-through entities, but members can opt for corporate taxation. Discuss with a tax advisor.
Changes and Amendments:
- Process for amending the operating agreement: Determine what percentage of member consent is required to modify the agreement.
- Guidelines for company management during transition events: Events such as member departures or managerial changes should have predetermined management plans.
- Conditions under which the LLC might be sold or merged: Detail the process and necessary approvals.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: These can save time and money compared to traditional litigation.
- Guidelines for non-compete and confidentiality agreements: Make sure they’re reasonable in scope and duration to be enforceable in New York.
- Provision for indemnification and limitation of liability: Protect members or managers from personal liability arising from their roles.
Record Keeping and Communication:
- Details about record keeping requirements: New York requires maintaining certain records, such as a list of members and capital contributions.
- Guidelines for how company-related decisions will be documented or communicated: Decide whether you’ll require written consent or if verbal agreements are acceptable.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While New York doesn’t always mandate a specific purpose, having one can clarify operations.
- Identification of the registered agent and office: A registered agent is required in New York. This agent receives official communications on behalf of the LLC.
- Procedures for dissolving the LLC: In alignment with New York laws, detailed steps such as notifying creditors and the distribution of assets.
- Procedures for winding down or liquidating the company’s assets: Establish a plan for discharging liabilities and distributing remaining assets to members.
How to Draft a New York 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.
If your business has multiple members, you should consider having an attorney draw up your operating agreement. An attorney will ensure that all bases are covered, and all members rights are protected. They can also include language that is specific to [state] 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 York 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
New York does not punish LLCs with no operating agreement, but the wise entrepreneur would only do business with 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 York?
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 York LLC does not have an operating agreement?
Technically, there are no legal consequences for not having an operating agreement in New York. But if a dispute arises among your members, New York’s default LLC rules would apply, and your members could end up in court.