Most people aren’t thinking about divorce on their wedding day. Similarly, when members of a limited liability company (LLC) optimistically join together on their new venture, a bitter dispute or parting of the ways with the folks they’ve gone into business with is probably not top of mind.
While the law doesn’t require that a couple enter into a written pre-nuptial agreement for their marriage to be valid and legal, many do so anyway to bring clarity and certainty in the event of a conflict, define their respective rights and obligations, and hopefully spare themselves lengthy, costly, and destructive litigation down the road. The same principles apply to New Jersey LLCs.
New Jersey law does not require limited liability companies to have written operating agreements. This is the case in many other states as well, including Delaware. But just because a written LLC operating agreement isn’t mandated by law in order to establish and maintain an LLC doesn’t mean that starting and managing an LLC without one is a good idea. In fact, failure to document and define the relationship between the members of an LLC can be costly for all involved.
What Is An LLC Operating Agreement?
While state LLC laws may establish the rights and obligations of the entity and its members to third parties and taxing authorities, an LLC operating agreement is the controlling agreement that sets forth the relationship between the members and each other and between the members and the LLC itself. Among other things, the operating agreement defines such core issues as ownership transfer, voting rights, business activities, management structure, management authority, and dispute resolution mechanisms. All of these areas are ripe for misunderstanding and divergent viewpoints unless clearly and definitively set forth in an agreement between all members.
Here are three reasons you should prepare an operating agreement for your New Jersey LLC, even though you don’t have to.
1. Clarifying Ownership and Management Responsibilities
A written LLC operating agreement is a foundational document that outlines the ownership structure and management responsibilities within the business. It clearly defines each member’s rights and obligations, including their ownership percentage, voting power, and profit distribution. This helps prevent conflicts and misunderstandings among members by establishing a framework for decision-making and governance. Additionally, the operating agreement can specify the roles and responsibilities of managers and non-managing members, providing clarity and promoting effective management of the LLC.
2. Protecting Members From Personal Liability
One of the key advantages of an LLC is in the name itself: limited liability. A properly structured and managed LLC protects members and members from personal liability for debts and liabilities incurred by the entity. But that protection is not unlimited and can be easily lost if the members and managers fail to maintain and treat the LLC as a separate entity or follow the corporate formalities required by law. By having a comprehensive written operating agreement, an LLC can better ensure that the members treat the business like a business rather than as a sole proprietorship with a fancy name. The operating agreement can also include provisions that ensure compliance with legal and regulatory requirements, reducing the risk of personal liability for the actions or debts of the company.
3. Resolving Deadlocks and Disputes
Business owners aren’t always going to see eye-to-eye. Sometimes, disagreements between LLC managers and members devolve into stalemates or conflicts that can threaten the relationships of the owners and the continued viability of the business. A well-drafted operating agreement recognizes the possibility, if not probability, of such disputes and deadlocks and includes mechanisms for resolving them that can spare the parties and the LLC from the costs and disruption of protracted litigation. Additionally, the operating agreement can include provisions for the voluntary or involuntary dissolution of the LLC, outlining the steps to be followed and the distribution of assets in such an event.
If you have questions about LLC operating agreements or would like assistance preparing one for your business, please contact one of the corporate law attorneys at Ansell, Grimm & Aaron.
