We’ve mentioned operating agreements in a few blogs, and we thought we’d go over it in more detail in this entry. What is an operating agreement and why does my LLC need one? An operating agreement is a key document for an LLC with a sound legal foundation. An agreement that is acceptable to all managing members of the LLC, even if you are a sole member of the LLC, will help your business run as it was intended. Well written operating agreements should give the LLC members peace of mind. We’ll map out the basics of a good operating agreement below.
Let’s start with NRS Chapter 86.286 Operating Agreement. “An LLC in Nevada may adopt but is not required to adopt an operating agreement.” However, without an operating agreement, your business may be operating without any rules. A well written operating agreement will clearly state the roles, contributions, and rights of each of its members, or outside parties, within the LLC. This is something that LLCs with a good legal foundation need. If a member fails to fulfill his or her duties, an operating agreement can define the liabilities for breach of contract and breach of duties. With specific terms in place, you can rest assured knowing your business is structured the way you want. If you cannot agree to operating agreement terms with other members, then you may want to reconsider entering your business venture together.
When does an operating agreement take effect? A good operating agreement will clearly state when it is adopted by the LLC. This may be before, after or at the time of the formation of business entity. If before, the operating agreement won’t be effective until the formation of the LLC. If it is adopted after the business is formed, then a good operating agreement will clearly state if it is enforced on the date of the LLC’s formation or at a later date specified in the document. The operating agreement binds the LLC to its terms on that specified date whether or not the LLC has complied with the operating agreement up to that point.
What else can or should an operating agreement cover? An operating agreement can be tailored for any business. The ranges of provisions and terms it can cover is extensive so we want to focus on the ones we think every operating agreement should have. You should consider the term of the LLC, how the membership interest will be valued, and when and how allocations are distributed. You’ll also want to consider what happens upon or after the death, retirement, resignation, expulsion, bankruptcy, dissolution or dissociation of, or any other event that affects a member or the last remaining member of the company. Lastly, you’ll want to clearly state a clause for dispute resolution in case a dispute arises between any of the members.
If you are looking to form or have an existing Nevada LLC, you should consider drafting an operating agreement to protect your interests. Even a sole member can benefit from an operating agreement as it can identify the owner as a separate entity from the LLC, further protecting personal assets. For more information on operating agreements, consult with an experienced contract attorney.