The initial and most important decision for prospective business owners concerns business structure. For numerous reasons, the most popular type, the limited liability corporation (LLC), melds the advantages of a partnership with those of a corporation. Despite that, people recommend that the entity have an operating agreement to address issues that state law would otherwise determine.
How many topics should the agreement address?
A written document, the operating agreement is a legal contract that provides legally and functionally important information about the LLC. This includes, but is not limited to:
Identifying the company: Official name, principal place of business, whether manager-managed or member-managed, statement of purpose and registered agent
Member information and duties: Includes members’ names, roles within the company, contribution value and distribution of profits and responsibilities
Tax treatment: Taxed at the individual level, i.e., members report their income and expenses on their individual tax returns. Provisions on how to change the tax status would likely be included here.
Operating procedures: A section that covers a breadth of issues from the time and place of member meetings and approval of manager actions to the process for adding new members and how to dissolve the LLC and possibly a liability statement.
New Jersey, like most other states, does not require an operating agreement.
Experience matters
Unforeseen changes—both externally from the business world and internally among the members and owners—can create havoc for business owners who relied on word of mouth and a handshake. A written operating agreement provides the most effective tool to protect an LLC, its members and assets. Attorneys who understand these changing needs can offer guidance.
