A lot of questions arise around the formation and managing of a limited liability company (LLC). How will it be managed? What are the rules that the member or members will abide by? What happens when there are disagreements? An LLC needs to decide these things in advance, before they cause confusion, dissension, and disputes. That’s why every New Jersey LLC should have an operating agreement, even though the Garden State doesn’t require it.
This article will explore what a New Jersey LLC operating agreement is, why every LLC needs one, what it should include, and how to create and maintain it.
An LLC operating agreement is the governing document for a limited liability company. It dictates how the LLC will be managed. It’s a legally binding agreement between the members of an LLC. It documents the ownership of the company, and it defines each member’s roles, rights, and responsibilities.
It says who the members are, what percentage of ownership each one has, and what each one’s privileges and responsibilities are. It dictates how the LLC will be run, how the proceeds will be distributed, how old members can drop out and new ones can come aboard, and what happens if the company dissolves.
It validates the company’s legitimacy as an LLC and its right to the associated taxation and liability benefits. It protects each member’s interests in case of internal malfeasance or disputes. It certifies that the LLC is a serious and credible business. Many banks will require an operating agreement before opening a business account or lending money.
A New Jersey LLC is not required by the state law to have an operating agreement, but a company that runs without one is assuming an unnecessary and potentially costly risk. For one thing, it establishes your credibility as a business. Many banks will not lend to an LLC or even open a business account unless they see an operating agreement. An agreement demonstrates that you are a valid LLC and are entitled to the taxation and liability advantages of an LLC.
An operating agreement is a legally binding document that has the force of law. It establishes the rights and responsibilities of every LLC member. If disputes between members wind up in court, the courts will refer to the operating agreement in settling them. Without an operating agreement, disagreements will be decided by New Jersey laws and regulations, even if the outcome isn’t what any of the members want. The state will decide, for example, how proceeds will be distributed and how assets will be allocated if the LLC dissolves.
It’s also important for a single-member LLC to have an operating agreement. We’ve already mentioned that you may need it if you go to a bank to open a business account or secure a loan. You may need it if your LLC purchases real estate. It draws a line between your personal financial activity and that of your business. If you go to court, it provides evidence that your LLC is a separate legal entity that shields you from personal liability for company indebtedness.
The New Jersey operating agreement is not a required document, and there’s no hard and fast list of what goes into it. At the least, it should contain the LLC name, the member names, and the start-up capital contributions. Beyond that, it can include anything you find necessary or useful. Here are some components to consider.
These should include the LLC name and the fact that the company is a New Jersey LLC. It also should state the business purpose, the address of the business, and the names of the members, as well as the date of formation and the company’s expected duration.
You should document the amount of money, assets, and other property each member brought into the LLC at startup. This constitutes their membership interest, usually given as a percentage. You might also address how members can make additional contributions.
This details how the business will be operated and decisions will be made. It lays out voting rights. It states what the officers are, how they will be chosen, and what their roles and responsibilities are. It describes how disputes will be settled. It may also contain indemnification clauses to protect members from legal action when they act in good faith. This may also address how company bookkeeping will be done.
One of the most important items is how and when profits will be distributed to the members. Profits and losses are allocated based on membership interest.
Members who bring professional expertise to the LLC are sometimes paid directly, apart from their share of the LLC profits. Members who actively manage the LLC may receive compensation that does not go to less active members. The compensation section spells out how payment amounts will be decided.
When a member sells their share and leaves the LLC, this constitutes a transfer. Usually, the remaining members will have first claim to buy the leaving member’s interest. This section details how the payment amount will be determined and paid.
It also addresses under what circumstances a member can sell to an outside party, as well as how a new member could join the LLC. In most cases, the agreement states that the new member must be approved unanimously.
LLCs don’t always remain active forever, and you should specify the circumstances that will cause the LLC to be dissolved, as well as the approval process, and the steps in dissolution.
You can lay out a process for making changes to the operating agreement. You should note that the members can change the operating agreement any time they want by writing and signing a new one.
All members must sign and date the agreement for it to be a legally binding document.
You create an operating agreement in New Jersey simply by writing and signing it. If you’re not sure what to include, there are many vendors that provide templates. These contain boilerplate language and space to fill in the details that apply to your specific situation.
You might also engage a business lawyer. New Jersey law doesn’t require this, but you are, after all, writing a legal document, and a professional attorney can ensure you haven’t left anything unclear or omitted something vital. Even if you write it yourself, it’s good practice to have it reviewed by a lawyer.
Every New Jersey LLC should have an operating agreement, even though the law doesn’t require it. It establishes your legitimacy as an LLC and your credibility with banks and lenders. It tells you how the business will be run and disputes will be resolved. Without it, your LLC may be governed by New Jersey state law in ways that may not benefit the LLC or its members.
An online LLC formation service is an excellent resource to help you with your operating agreement. These services guide you through the agreement, and they also provide startup services like filing articles of organization, establishing registered agents, and complying with tax regulations. Many offer ongoing LLC support in such areas as required state reporting. It’s a great way to ensure you don’t skip any necessary steps in ramping up your LLC.
No. However, you may need it to work with banks and lenders. Also, it specifies in advance how you will deal with disagreements and other issues that come up during the life of an LLC.
Yes,. However, to ensure you have covered all the necessary points, it’s good practice to use a template, engage an LLC formation service, and/or consult a business attorney.
You run unnecessary risks. There can be issues any time a dispute arises or a difficult business decision is called for. If a dispute goes to court, it will be resolved according to New Jersey law, which may or may not meet the wishes of the members.
Even a single-member LLC is wise to have an agreement. It guides business decisions, establishes your credibility as an LLC, and may be necessary to open a business bank account or to secure a loan.
A New Jersey LLC operating agreement does not get filed with the state, so it’s up to you to safeguard it. Some LLC formation services will keep a copy for you. The agreement should be stored along with other critical business documents, and each member should have a personal copy.
LLC operating agreements, once they’re signed by all members, are legally binding. New Jersey courts will generally enforce the terms of the agreements.
Yes. The agreement itself can spell out the process for modifying it. Alternatively, the members can change it simply by creating and signing a new operating agreement that supersedes the old one.
This portion of our website is for informational or educational purposes only. Tailor Brands is not a law firm, and the information on this website does not constitute legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos on this page.
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