Starting your own business is an exciting process. You should start by choosing a business form for your future company. If you decide to become an LLC owner in New York, you should know about one of the key documents for running such a company. This article will focus on the LLC Operating Agreement.
It is a document that not only sets the rules and expectations for your company but also strengthens your firm's reputation. In addition, this paper is required by the government for this type of company in New York.
What Is This Form
No matter how many members there are in your business, New York State expects this document to be drafted for the LLC. The form describes the rules for the functioning of the company, the ownership structure, and operating procedures that the participants (or one) of the business set out on their own and which will be binding on all participants.
Below we list the topics that the agreement should cover. It is essential to note that even if there is only one member of the company, all topics should be covered. Even though some of them won't be of great value to an organization with only one member. This is essential for the fulfillment of legal formalities.
Parts of the Document
The following paper is divided into six blocks and touches on the topics of organization, management and voting, capital contributions, distributions, changes to the membership structure, and dissolution.1. Organization
This is a short description of the organization. This section indicates:
- Date of company establishment
- List of company members
- Division of ownership of the company (there may be the same shares for all or different shares for each of the participants)
This section indicates the type of LLC control. You can appoint a manager or manage members. It is also important to take the form of voting on key business issues. You can give each participant one vote or split the votes in another way of your choice.3. Capital Contributions
This is the amount of money that members have invested in the LLC. Additionally, it is necessary to formulate a strategy for attracting additional funding.4. Distributions
Formulate an approach to the distribution of profits and losses. Most often, an equal distribution of profits is taken. But you can choose any available option and detail it in your paper.5. Changes to Membership Structure
When you start a company, you think it will last forever. But in most cases, this is not the case, and any business is subject to change. Therefore, it is necessary to indicate the actions in case one of the participants leaves the company. Formulate an action plan to replace a member or to buy out their share in the business; and how exactly the rights will be transferred.6. Dissolution
You might even want to close the LLC. For such a case, you must describe in detail the procedure for liquidating the company. This is a mandatory and essential aspect of the agreement that should not be overlooked.
As we mentioned above, the creation of an LLC operating agreement in New York is mandatory and required by law. This is stated in Section 417 of the Limited Liability Company Law. However, the law does not provide for any measures related to the absence of this document.
The Statue also spells out the time frame when an agreement must be formulated. It is required to be concluded before, during, or within 90 days of the filing of the Articles of Organization. The agreement does not need to be submitted to the Department of the State, as it is an internal document of the company.
Even though this document is mandatory for all New York LLCs, some may have questions about why they still need this agreement. We will try to convince you.
Why Should I Have an LLC Operating Agreement?
Of course, the simplest answer is that this is what the law requires. Refer to Section 417 of New York Consolidated Laws for this rule.
However, there are other reasons for creating this document:
- The document fully describes all the rules of operational management of the company, and this excludes the occurrence of misunderstandings and disputes between business participants. The document specifies clear roles, distribution of profits, and losses for each member. All possible procedures are spelled out and exclude further conflicts.
- In the absence of this document and when litigation arises, the court will follow the general state rules. This, in turn, can negatively affect the outcome of the court decision, not in your favor.
- The document is often requested by potential partners and investors. Studying the agreement will help them value the business.
- If you are the only member of your LLC, the document will increase the credibility of your business and, if necessary, confirm the status of the company in court. That is, the agreement acts as a confirmation of the status of the LLC company.
- When opening a commercial bank account, lenders often ask for this form. This way, they can verify that members are eligible to create an account or receive a loan on behalf of the company.
You might think that the Articles of Organization are enough for you. But this is not the case. These documents have different purposes. The Articles are used to create a legal entity with the New York Division of Corporations. At the same time, the Agreement is an internal document of the company describing all the operational processes, principles, and management of the organization.
It is also worth mentioning that it is now possible to submit Articles of Organization to the New York State Department of State online. To do this, download the forms on the site, fill them out and pay a fee.
What To Do After Creating The Document
New York law does not provide for a specific procedure after this form is completed. You do not need to file it within the state. But care must be taken to ensure that each member of the LLC has a signed copy of the agreement. Store your papers in a safe but easily accessible place so that you can refer to them quickly at all times.
The periodic update of the document is also recommended. For instance, after adding a new member or after one of the members leaves the board. Changes must be made to the document following the rules spelled out in your agreement. The consent of all participants may be required.
To Sum Up
The creation of an operating agreement is one of the essential steps for the formation of an LLC in New York. Even if it is not required by law (and it is required), we would recommend creating such a document for each company. This is necessary to have written, certified principles for the existence of your business, its rules, and processes for regulating complex issues.
Before accepting the document, we recommend contacting a reliable lawyer. Although modern online services allow you to create a document yourself, so this may be enough for the initial stage.