What is an LLC Operating Agreement?
If you’re starting a business with other people, you need to establish everyone’s responsibilities and duties within the company. An LLC operating agreement is a document that outlines these duties and obligations in writing so everyone knows what to expect. This agreement can discuss elements like business relationships, job descriptions for each founding member, who holds authority for different decisions and aspects of the company, and more.
North Carolina doesn’t require a written operating agreement. Under the state’s LLC Act, an operating agreement can be written, oral or implied, and your Articles of Organization count as part of it. A written agreement is still the best way to record how your business works.
Once this agreement is created and signed by all LLC members, it’s legally binding and overrides most of the default rules in North Carolina’s LLC Act. A few rules can’t be changed, such as state filing requirements. For example, if a founding member leaves the company, the operating agreement can outline the whole process to ensure stability and consistency.
Overall, an LLC operating agreement is both a reference guide for your business and a means of protecting everyone involved when you create an LLC in North Carolina. Operating agreements can help settle disputes, streamline operations, and ensure that everyone fulfills their obligations.
Why is an Operating Agreement Important for North Carolina LLCs?
Even though North Carolina doesn’t require a written agreement, you should still create one. Some of the main advantages of this document include:
- Customize Your Business Structure: You and your business partners should already know how you want to run your new company. An operating agreement allows you to split duties and responsibilities however you see fit. For example, one person may run day-to-day operations while another oversees financing and accounting.
- Protect Your Liability: A written agreement helps show your LLC is separate from you, which supports your limited liability protection. A formal operating agreement can further protect members by outlining specific guidelines and protections for each person. This matters for single-member LLCs too.
- Avoid State Default Rules: Each state has its own procedures for what to do when managing a business. Without an operating agreement, disputes and other legal filings are subject to these rules and regulations. Because the state doesn’t understand the ins and outs of your LLC, it’s best to outline these rules in a formal agreement instead.
Key Components of a North Carolina LLC Operating Agreement
North Carolina law doesn’t list required contents, so you can tailor the agreement to your business. Here are some core components that should be part of the document.
- Ownership and Formation Details: These details can include who formed the LLC, what the company does, when it was created, and who is in charge of the business. You should also include ownership percentages so there’s no dispute regarding how much each person owns later on.
- Contributions and Distributions: Forming a business requires upfront capital, so the operating agreement should outline how much each founding member contributed toward its formation. You should also include distribution percentages, as well as a process for how to change these percentages later on.
- Member Roles and Responsibilities: Just because someone helped create an LLC doesn’t mean they’ll run day-to-day operations. The operating agreement should outline each member’s specific role and responsibilities. Here is where it’s good to be hyper-specific, so everyone knows who is ultimately in charge of each aspect of running the company.
- Voting Rights and Decision-Making: Some decisions may fall under the authority of a particular member based on the roles outlined within the agreement. In other cases, all members may have to vote on different items and decisions. Be as detailed as possible when discussing who can vote, when they can vote, and how much their vote is worth (e.g., if a member can veto a decision made by another member).
- Dissolution: Over time, founding members may leave the LLC for various reasons. You must outline the process for a single member to leave the LLC, as well as how to dissolve an LLC in NC.
- Dispute Resolution: Disagreements and disputes happen all the time. The operating agreement should outline how these disputes should be handled to avoid lengthy court cases and arbitration.
How to Create an LLC Operating Agreement in North Carolina
Before you draft your operating agreement (or fill in an LLC operating agreement template), decide which sections you’ll include in the document (such as those listed in the previous section). You can also find operating agreement templates that allow you to fill in company-specific details. The basic steps of creating this agreement are:
- First, outline the different sections of the agreement.
- Next, fill in your business information, such as company name, address, and contact information.
- Discuss specific details about management roles, contributions, and ownership stakes with the other founding members.
- Create a draft for each section and have all other members review and approve each one.
- Consult an attorney to ensure all legal terms are binding and accurate.
- Have all founding members sign the agreement.
While you can do all of this yourself, it’s often best to work with an LLC formation service. These services can offer insights and help draft an agreement that is both comprehensive and easy to implement. Plus, you get the peace of mind of knowing that your agreement isn’t missing any crucial details.
North Carolina Specific Considerations
In North Carolina, you must submit articles of organization with the Secretary of State when forming your LLC. However, the state doesn’t require that all founding members be listed on the document. Only the people who sign the Articles (members or organizers) are listed. Although this process can help maintain individual privacy, it can create a headache if you have to prove ownership of the business. So, having an operating agreement that outlines your ownership stake and distribution can come in handy if or when you’re faced with a legal dispute.
Final Thoughts and Next Steps
Although there are many details to consider when forming your North Carolina LLC, your operating agreement should be a priority. Because this document can alleviate any potential disputes or legal challenges, it’s imperative that you take the time to make it as detailed and efficient as possible.
One of the best ways to ensure your operating agreement works well is to hire LLC formation services. Even if you’re an experienced entrepreneur, it’s always best to have an extra set of eyes on a legally binding document, especially a company specializing in LLCs. Overall, this is one document you can’t afford to fill out incorrectly, even if the state doesn’t require it.
FAQs
No. North Carolina doesn’t require a written operating agreement, and you don’t file one with the state. State law allows an operating agreement to be written, oral or implied.
Yes, you can write your own operating agreement. However, for multi-member LLCs, it’s often better to consult with third-party LLC formation services to ensure your agreement is accurate and comprehensive.
Without an operating agreement, any disputes or legal actions will default to the state’s rules and regulations. Unfortunately, these guidelines may not benefit your business or its founding members, leading to undesirable results. Another issue with defaulting to state laws is that it can lead to disputes that take time and money to resolve.
Even if you have a single-member LLC, it’s still a good idea to have an operating agreement. It records that you own the LLC and helps show the business is separate from you, which supports your liability protection. It doesn’t change how the IRS taxes a single-member LLC.
Each member should have a copy. Keep the original with your LLC’s records in a secure place, and keep a digital copy.