What Is an LLC Operating Agreement?
Background
An LLC Operating Agreement is a legally binding document that defines the ownership structure, management responsibilities, and operating procedures of a Limited Liability Company (LLC). It serves as a contract among the LLC’s members that governs how the company is organized, managed, and conducts business. Once executed, the Operating Agreement is binding on all Members. Notably, in New York State, every LLC is required to adopt and maintain an Operating Agreement.
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Why Is an Operating Agreement Important for Your LLC?
There are several important reasons why every LLC should have an operating agreement. First, an operating agreement clearly defines each member’s roles and responsibilities, providing structure and reducing the potential for internal disputes. It also helps safeguard members by reinforcing their limited liability protection under the law. In addition, a well-drafted Operating Agreement enhances the company’s credibility with banks, investors, and potential business partners.
If you need assistance drafting or reviewing an Operating Agreement tailored to your business, The West Firm offers comprehensive legal services to ensure your agreement meets all legal and operational requirements.
Key Provisions in an Operating Agreement
Operating Agreements establish the framework for an LLC’s operations, including procedures for decision-making, the allocation of profits and losses, and the management of company business affairs.
Common provisions found in an operating agreement include:
Member ownership interests (expressed as percentages or units)
Powers and duties of managers and members
Tax election of the LLC
Allocation of profits and losses
Notice and procedures for member meetings
Member voting rights
Assignment and transfer of ownership interests
Terms governing dissolution
While these are among the key provisions typically included in an operating agreement, each agreement can—and should—be tailored to reflect the unique structure, objectives, and needs of the LLC and its Members. A carefully drafted Operating Agreement provides clarity, mitigates risk, and protects the company’s long-term business interests
Check out our blog: How to Form a Limited Liability Company (LLC) in New York
How to Create an Operating Agreement
An Operating Agreement should be carefully drafted to reflect the specific needs and objectives of your LLC. Because it is a legally binding document governing how your company is structured and operated, it is essential that the agreement be prepared and reviewed by an attorney experienced in Limited Liability Company law within the applicable jurisdiction. The West Firm has extensive experience assisting New York State businesses in drafting and customizing Operating Agreements that align with each company’s unique goals while ensuring full compliance with state law. Once finalized, the Operating Agreement must be approved and executed by all members of the LLC.
What Happens Without an Operating Agreement?
When an LLC does not adopt an Operating Agreement, it becomes subject to the default provisions of the New York State Limited Liability Company Law. Under these default rules, members holding a majority interest may, among other things, admit new members, issue additional membership interests (potentially diluting existing ownership percentages), incur debt on behalf of the LLC, and approve the sale of LLC assets.
An operating agreement also serves an important legal function by formally distinguishing the LLC as a separate legal entity and reinforcing the members’ limited liability protections. Without one, members risk having their personal assets exposed to satisfy the company’s obligations.
In addition, operating an LLC without an Operating Agreement can lead to internal conflict. A well-drafted operating agreement establishes clear governance structures, operational procedures, and dispute-resolution mechanisms—reducing the likelihood of misunderstandings and preserving the stability of the business.
Frequently Asked Questions
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Yes, all LLCs formed in New York State are required to have an operating agreement. While there is no formal penalty for failing to adopt an Operating Agreement, the LLC will be governed by the default provisions of the New York State Limited Liability Company Law, which may not reflect the members’ intended structure or decision-making processes.
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While it is possible to draft an Operating Agreement independently—using templates or other resources—it is highly advisable to consult an attorney experienced in Limited Liability Company law. A legal professional can ensure the agreement is tailored to your LLC’s specific needs, complies with state law, and adequately protects the members’ interests.
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An operating agreement reinforces the LLC’s status as a distinct legal entity and formalizes its organizational structure, thereby strengthening the members’ limited liability protections. By clearly separating the LLC from a sole proprietorship or partnership, the agreement helps prevent members from being held personally liable for the company’s debts or other obligations.
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