Drafting an Operating Agreement in New York

Last updated on: July 15, 2021

What Is a New York LLC Operating Agreement?

The operating agreement, is a legal document that covers the legal and financial provisions of your company. The limited liability company operating agreement in New York covers important details such as voting, who’s in charge, procedures for member additions and resignations, how you share profits and losses, and membership. Companies use an operating agreement in New York State to govern their operations and simplify their management structures.

Why is an operating agreement important?

While the law does not explicitly require you to have an LLC operating agreement, it expects you to have some guidelines in place. Take the example of a dissolution where you cannot decide who walks away with what. The first thing a court would ask for is the operating agreement to clarify what you have decided. An LLC without an operating agreement will be subject to the New York’s “default rules”. You can now see why the operating agreement is important.

Benefits of Creating an Operating Agreement

Other than avoiding generic laws, having an operating agreement also helps with:

  • Protection: it establishes the entity’s limited liability status enabling you to enjoy personal asset protection
  • Clarity: members know what to expect and this reduces future conflicts
  • Stability: having rules helps potential investors and partners trust you more. When evaluating a business, people want to see if they will enjoy stability
  • Account opening: when opening a business bank account, the bank will request an operating agreement, without which, the process will not move forward
  • Succession: you can be clear on who takes over the LLC New York in case one of you dies or leaves

You also get greater respect from New York courts.

How can an operating agreement be drawn up?

You can make your operating agreement via:

  • An attorney: hiring a professional to draft this legally binding document is a good idea if your operations are complex. They can seek loopholes and adequately address them, ensuring the clauses are clear and admissible in a court of law. However, the high cost of this option has led to alternatives such as;
  • Doing it yourself: did you know that you can also draft the operating agreement for LLC? All you need is to get the insight of your members when creating it. Once everyone is on board, you can go ahead with signing and keeping it in the records. If you’re not sure where to start, you can always use this third option;
  • Using an online generator: technology has been a gem in the world of business and there are many LLC operating agreement templates you can use to create your NYC LLC guidelines. Let’s look at the basics of these documents in detail:

What should be included in an operating agreement?

Whether you are forming a single-member or multi-member company, you need to include:

  • The state: you will start by indicating where you plan to conduct your business. In this case, it will be New York. The generators often have other options too if you would like to expand your operations at a later date. Please note that for this, you also have to go through registration in the other region.
  • Specialized Services: it’s not time to state your operations but rather to distinguish yourself from companies that offer professional services. If you will offer such services, such as physical therapy and psychology sessions, you need to get certification for this. Ideally, you should get this at the time of registration. You cannot spring this on the authorities at this stage. If your registration documents don’t include such services, skip this step.
  • Primary Services: it’s now time to be clear about what you do. It does not have to be broad. A brief overview will do as long as you are clear about your sector e.g., construction.
  • Details: you need to provide the name of the company. It should be in line with the state guidelines e.g., it cannot allude that you offer statutory services. Please read about the naming regulations before choosing one. Ideally, you should have already covered this stage by the time you make your agreement because most companies draft these guidelines after getting their companies approved. You also need to include your main address. It does not even have to be in New York. It’s an address of where your operations will take place.
  • Membership: first, you have to decide if you will group your members into different classes. For example, some people can have more rights to the profits than others. If you will have such distinctions, you must be clear on what they are. Some companies offer such levels to their investors as a way to reduce their control while allowing them to participate in capital investments.

You also have to be clear on if the members are trusts, LLCs, corporations or individuals while indicating their names and addresses. Against each entity, state how much this person/ company has brought to the organization. It includes money, services, knowledge, machines and other assets. You also need to include whether you will need or allow contributions in the future. Be clear about these as they affect the sharing of resources at the time of dissolution. The court may also require clarification on this if your internal affairs end up in the court system.

The admission or lack thereof of other members is important. This allowance allows the company to expand but it also comes with the risk of a power shift. Are members willing to bring on more resources?

You also need to discuss how often you will meet. It can be weekly, monthly, quarterly or even yearly. In some cases, you can even decide to only meet when it’s necessary. The law is lenient on this and nobody will come knocking on your door demanding minutes from your last meeting. If any voting will take place, you can divide the rights based on ownership or allow everyone to have one vote. It can be a source of disgruntlement in the future and you need to be clear about it from the start.

  • Management: you need to have someone at the helm handling the operations. It can be a member or you can work with an appointed manager.

It is important that you choose a tax classification for your company. You can work with the default based on the number of members or you can elect another option and file the same with the state.

Who will enter into contracts on behalf of the company? You can allow any member to do this or can select specific people for this role. Even so, some decisions will require everyone to be on board e.g., the release of payments above a specific amount.

Finally, are members allowed to start businesses that directly compete with the parent company? You need to decide now.

  • Miscellaneous: you may realize that you have not covered all aspects of your operations. Make sure you include them in the final draft

You can now sign the operating agreement of LLC in front of witnesses and keep it in your records. The state will not require it. However, you will need it when opening a bank account or to defend your actions in court.

How much does an operating agreement cost in New York State?

It depends on how you draft the operating agreement for LLC in NYC. With an attorney, it can cost you $100 or more. Professional services can do it for about $40 to $100. Doing it yourself using an online generator will barely cost you a dime. But where you are dealing with technical matters, it’s best to engage a lawyer or pro service.

What Rules apply to an LLC without an Operating Agreement?

Every state has default laws applicable to LLCs where no clear management guidelines are in place. These come into effect when you go through the court system after failing to agree on the best course of action. Unfortunately, these default definition laws are generic and are not suited to your business. It’s easy to find yourself on the losing end because the laws may favor some members and leave you in a tough situation. To get ahead of the problem, protect yourself today by drafting an LLC operating agreement New York.

Senior Business Tax Writer, etc
Jean Wilson Murray
(323) 789-5289
Senior Business Tax Writer, etc
Jean Wilson Murray

In this IncFile vs ZenBusiness review, we're going to compare two of the most popular LLC formation services based on pricing, features, and drawing out differences and similarities to let you see which is most suitable for you and your business.

You can learn more about @Mike here.

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