Suppose you’re starting a business and forming a limited liability company (LLC) in North Dakota. 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 Dakota 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 Dakota Operating Agreement Include?
The North Dakota Operating Agreement frames the inner dynamics of an LLC in the state. Recognizing its core elements is critical for streamlined management and precluding potential issues.
- Each member’s rights and responsibilities: Clearly lay out what is expected from each member regarding their roles, decision-making, and overall participation.
- Capital contribution requirements for each member: Specify the initial amount or property each member will contribute and any future required contributions.
- Procedures for adding and removing members: North Dakota allows flexibility in setting rules for this. You could require unanimous consent, a majority vote, or other criteria.
- What happens when a member sells their interest, becomes disabled, or dies: Establish procedures such as buy-sell agreements or other mechanisms to handle these scenarios.
- Conditions under which a member might become bankrupt or insolvent: Describe the actions to be taken, including whether the LLC will buy back the member’s interest or if the member will be dissociated from the LLC.
Management and Voting:
- Management structure and roles of members: North Dakota LLCs can be either member-managed or manager-managed. Define which applies and describe roles and responsibilities accordingly.
- Voting rights of each member: Typically, voting is proportional to ownership percentages, but you can define a different structure if preferred.
- Rules for meetings and voting: Lay out when regular meetings will occur, notice requirements, and what constitutes a quorum.
- Rules for managing potential conflicts of interest among members: Implement guidelines to ensure fairness and transparency when conflicts arise.
- Allocation of profits, losses, and distributions: Usually based on ownership stakes, but you can set a different method if agreed upon by members.
- Provision for periodic financial audits or reviews: State the frequency and nature of financial reviews to ensure financial transparency.
- Tax treatment of the LLC: By default, LLCs are taxed as pass-through entities, but you can choose for the LLC to be taxed as a corporation.
Changes and Amendments:
- Process for amending the operating agreement: Specify whether a unanimous decision, supermajority, or other criteria is required for changes.
- Guidelines for company management during transition events: Provide clarity on how the LLC will operate during major transitions or changes.
- Conditions under which the LLC might be sold or merged: Describe the process and approval needed for such significant decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Promote alternative dispute resolution methods to potentially save on litigation costs and time.
- Guidelines for non-compete and confidentiality agreements: Ensure any restrictions are reasonable in scope and duration to be enforceable in North Dakota.
- Provision for indemnification and limitation of liability: Define scenarios in which members or managers might be protected from personal liability.
Record Keeping and Communication:
- Details about record keeping requirements: Specify the types of records that must be maintained and their storage methods.
- Guidelines for how company-related decisions will be documented or communicated: This could include minutes of meetings, written consents, and other official documents.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While North Dakota doesn’t require a specified purpose, you can include it for clarity.
- Identification of the registered agent and office: Mandatory in North Dakota, this should state the name and address of your designated agent.
- Procedures for dissolving the LLC: Outline steps to dissolve the LLC in accordance with North Dakota’s requirements.
- Procedures for winding down or liquidating the company’s assets: Describe the process for settling debts, handling remaining assets, and distributing any leftover capital to members.
How to Draft a North Dakota 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 North Dakota 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 North Dakota 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 Dakota, 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 Dakota?
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 Dakota LLC does not have an operating agreement?
North Dakota default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.