An LLC is a hybrid form of business organization in which members limit their liability for the business’ contractual obligations. LLCs give members some of the legal protections of a corporation while providing some of the flexibility of a partnership. New York State requires LLCs to have operating agreements, which define members’ responsibilities and how decisions are made on behalf of the LLC.
Operating agreements can be relatively simple or quite complex, depending on the nature of the LLC and its business. Either way, operating agreements provide a roadmap for how your business will operate as it grows and changes. This article will help you understand this document’s role, the considerations and components of an effective operating agreement, and best practices for creating an operating agreement for your New York LLC.
New York LLC operating agreements define the rights, powers, duties, liabilities, and obligations of the LLC members, both among themselves and as they relate to the LLC. In short, they provide the legal framework for how each LLC works. LLC members have substantial flexibility when structuring operating agreements. However, once established, the operating agreement defines the rights and obligations of each member, so it is critical that the operating agreement describes the protections and obligations of each member.
Proper operating agreements protect the rights of all members, including, for example, minority members. New York law allows LLC members with a majority of the membership interests to change the operating agreement. So, if an LLC has five equal members, three can make decisions for the LLC without the consent of the other two. However, the operating agreement can be written to protect the minority interests by requiring a supermajority or unanimous consent to make specific decisions. In short, the LLC members can define the rules under which they will operate, and they do so through their operating agreement.
An effective operating agreement defines how the LLCs will work. When properly structured and in black and white, an operating agreement reduces certain disputes. LLC members may disagree on some issues, but the operating agreement inherently eliminates many disputes or defines how they resolve others.
In addition to identifying basic information such as the LLC name, business purpose and address, and the registered agent, an effective operating agreement covers five important topics.
The ownership structure portion identifies the LLC members’ names and contact information, each member’s shares, their initial and expected future financial or other contributions, and how shares are distributed to new members or redistributed among existing members.
The operating agreement should also define how you manage the LLC. Defining how the strategic directions are set and by whom, along with how day-to-day operations are managed, is critical, whether those duties fall on members or hired managers. The agreement should clearly define the roles and responsibilities of each member.
Your LLC must decide about current and future operations, so defining how you will make those decisions is critical. That may require establishing procedures for the frequency and conduct of member meetings and how voting occurs. In addition, appropriately identifying whether or which decisions require unanimous or majority votes will reduce the potential for future disagreements.
Over time, your LLC may experience transitions in leadership among members or hired managers, so it is important to define how those processes will occur and how to make those decisions. Depending on the nature of your business and the level of day-to-day involvement among members, you may need to determine compensation procedures for those managing the business.
After accounting for your business’ operating expenses, your LLC may generate a profit or loss, which you must allocate among the members. Establishing how to distribute profits and losses and the procedures for distributing profits among the members are fundamental to your operating agreement.
In addition to those issues, the LLC also needs to define its fiscal year, its financial record-keeping procedures, and the tax implications of those decisions.
Even a successful LLC that experiences a few disagreements among members may need to add new members and transition existing members from the LLC. Establishing these procedures is important when the changes occur by mutual agreements and are especially critical when they result from conflict.
Accounting for potential challenges before they occur avoids the potential for misunderstandings and delays.
Forming an LLC requires choosing an LLC name, appointing a registered agent, and filing your Articles of Organization with the New York Department of State, along with paying a $200 fee. You also must follow the steps and information provided above when creating your operating agreement before, at the time, or within 90 days of filing your LLC’s Articles of Organization.
In addition, as part of forming the LLC, you must publish a notice of our LLC’s formation in two New York newspapers determined suitable by the county clerk (of the county where you have your offices). You also need an IRS Employer Identification Number (EIN) for the business.
Since LLC operating agreements are legal documents that often require precise language, many people forming LLCs work with a lawyer, a compliance service like Tailor Brands, or another entity specializing in developing LLC operating agreements. If you work with an outside entity to create your operating agreement, they will walk you through the steps needed to make your operating agreement.
Unlike most states, New York requires a written operating agreement signed by each LLC member. While you must complete your LLCs operating agreement within 90 days of filing your Articles of Organization, the operating agreement does not require to be filed with the state.
New York law requires that LLCs have a written operating agreement. Beyond the base requirement, a well-conceived operating agreement provides a roadmap for how your LLC will conduct business, settle disagreements among members, and renew itself as existing members depart and new members join.
Without an operating agreement, your LLC is subject to New York’s default LLC laws, so it is in your best interest to develop an operating agreement tailored to the needs of your business and the LLC members.
We recommend consulting with your lawyers or others who specialize in developing operating agreements to ensure that yours is tailored to your business.
Yes. The members of a New York LLC must adopt an operating agreement under Section 417 of the Limited Liability Company Law. You may create the agreement before, at the time of, or within 90 days of filing your Articles of Organization. You are not required to file the operating agreement with the state, though all LLC members must sign the agreement.
Yes. Anyone can create an operating agreement for a New York LLC. However, the operating agreement is a legal document that typically includes detailed financial information, so we recommend working with a lawyer, a compliance service like Tailor Brands, or another entity specializing in developing these LLC operating agreements.
New York law does not include penalties for failing to have a written LLC operating agreement, so you might think the agreement is unimportant. Instead, LLCs that do not establish an operating agreement fall under New York’s LLC law by default. In effect, this means generic laws will rule your LLC rather than an agreement customized for your business. Whether or not the default New York law adequately meets your LLC’s needs is unknown.
Yes. Single-member LLCs must have a written operating agreement. Although this may seem counterintuitive, you need an operating agreement because you and your LLC are separate legal entities. As a result, you need an operating agreement defining the relationship and procedures between yourself and your LLCs, spelling out many of the above mentioned issues. Of course, as the sole member, you can modify the operating agreement as you wish, but if you do not have a written operating agreement in place, New York’s default LLC laws will rule your LLC.
Your operating agreement is an internal document, so you should store it with other key business documents in a safe location. Suggested storage locations include a safe deposit box, a fireproof safe, in the cloud, with your lawyer, or at other secure locations. Wherever you choose to store it, be sure that trusted advisors can access it in the event you become incapacitated and cannot access the document yourself.
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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