Suppose you’re starting a business and forming a limited liability company (LLC) in North Carolina. 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, North Carolina 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 North Carolina Operating Agreement Include?
The North Carolina Operating Agreement establishes the internal guidelines for an LLC in the state. Familiarity with its chief components is essential for efficient governance and averting potential conflicts.
- Each member’s rights and responsibilities: Clarify roles, responsibilities, and expectations for each member. This should align with North Carolina’s default rules unless you specify otherwise.
- Capital contribution requirements for each member: Detail the amount and type of initial contributions and any future expected contributions from members.
- Procedures for adding and removing members: Establish clear protocols for bringing in new members or the exit of existing ones. This can be based on mutual agreement, majority vote, etc.
- What happens when a member sells their interest, becomes disabled, or dies: Describe mechanisms like buy-sell agreements to manage these scenarios.
- Conditions under which a member might become bankrupt or insolvent: Define actions, such as forced buyout or dissociation, in such cases.
Management and Voting:
- Management structure and roles of members: Specify whether the LLC is member-managed or manager-managed in line with North Carolina statutes.
- Voting rights of each member: Usually determined by ownership percentage, but alternative structures can be established.
- Rules for meetings and voting: Define frequency, notice requirements, and quorum for meetings.
- Rules for managing potential conflicts of interest among members: Implement transparency and fairness provisions to manage potential conflicts.
- Allocation of profits, losses, and distributions: Typically based on ownership stakes, but alternative methods can be agreed upon.
- Provision for periodic financial audits or reviews: Define the nature and frequency of these audits to maintain financial accountability.
- Tax treatment of the LLC: By default, LLCs are taxed as pass-through entities, but you can elect for corporate tax treatment.
Changes and Amendments:
- Process for amending the operating agreement: Specify the vote percentage required for changes, whether unanimous, supermajority, or other.
- Guidelines for company management during transition events: Ensure clarity on operations during significant transitions or changes.
- Conditions under which the LLC might be sold or merged: Define approval processes for such decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Promote alternative dispute resolution to save on potential legal fees and time.
- Guidelines for non-compete and confidentiality agreements: North Carolina enforces reasonable non-compete agreements, so ensure any restrictions are clear and justifiable.
- Provision for indemnification and limitation of liability: Clarify scenarios where members or managers are protected from personal liability.
Record Keeping and Communication:
- Details about record keeping requirements: Establish the types of records that must be maintained and their storage methods in compliance with North Carolina law.
- Guidelines for how company-related decisions will be documented or communicated: Can include the use of meeting minutes, written consents, and other documentation.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While not mandatory in North Carolina, it provides clarity to the business’s mission.
- Identification of the registered agent and office: Mandatory in North Carolina. Clearly list the agent’s name and address.
- Procedures for dissolving the LLC: Ensure this is in line with North Carolina’s requirements for dissolution.
- Procedures for winding down or liquidating the company’s assets: Detail steps for settling liabilities, handling assets, and distributing remaining capital.
How to Draft a North Carolina 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 member’s rights are protected. They can also include language that is specific to North Carolina 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 are public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Though you can add brief provisions to your articles of organization that might overlap with an operating agreement, it’d be wise to create a separate operating agreement internally for your LLC. If you decide to change your provisions, you’ll have to pay a fee to amend your articles of organization.
On the other hand, as an internal document, an operating agreement can be changed at any time for no charge.
Keep Your North Carolina 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 North Carolina, 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 North Carolina?
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 North Carolina LLC does not have an operating agreement?
North Carolina default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.