A New Mexico LLC Operating Agreement is a contract that details the structure, management power, and responsibility of all the company members.
This business contract is a crucial step in ensuring smooth operating procedures. This contract will contain all the policies and procedures of the company, as well as information on how to handle any potential issues, such as disagreements, payouts, future expansion of members, etc.
While this document is not technically required by the state, a New Mexico operating agreement is essential for maximum legal protection. The operating agreement also protects the individual members of the company by separating them fiscally from the company.
This way, if the owners of the company face any legal problems, the company wouldn’t necessarily be forced to suffer by being viewed as a personal asset. All the members of the document should review and sign it, with any questions being addressed to a professional attorney.
Limited Liability Companies: Chapter 53, Article 19
Operating Agreement Laws: § 53-19-19
State Definition: § 53-19-2(“O”)
Types of Operating Agreement
The two types of New Mexico LLC operating agreements are single-member and multi-member:
Single Member LLC operating agreement
A Single-Member LLC operating agreement will allow the single owner to lay the ground rules for company policies and also provide them with protection in the event of legal action taken against them.
Download: Microsoft Word (.docx)
Multi Member agreement
A Multi-Member agreement is for companies with more than one member and can do everything the Single-Member contract entails, plus establish the responsibilities of each of the members.
Download: Microsoft Word (.docx)
Reasons to Create Operating Agreement
A New Mexico LLC operating agreement has numerous benefits that can be personalized to fit a specific company’s needs. Here are just a few of the reasons to create one:
Clarity in verbal agreements
Misunderstandings happen all the time, so to avoid poorly interpreted verbal agreements, an LLC operating agreement explicitly states all member’s duties and responsibilities. By doing so, all of the company members are in agreement, avoiding potential disputes, disagreements, and financial trouble. It’s essential to guarantee that the very foundation of a business is well-established.
Having an operating agreement in writing makes sure no member can have false expectations and, ultimately, stops misunderstandings before they even happen.
Protects limited liability status
This document ensures that the company can uphold its legal limited liability status. By doing so, members can keep their personal and business finances separate, preventing courts from merging the two. This is crucial for single-member LLCs. The company’s structure and duties within a New Mexico operating agreement are specified.
It allows the members to protect their limited liability status by maintaining their control over their responsibilities. Additionally, it will prevent the company from referring back to generic Nevada LLC statutes, which may not benefit the members.
Recommendation by state
The state of New Mexico explicitly states the importance of entering into an operating agreement for all LLCs (New Mexico Code Section 53-19-29(O)). Though the state does not technically require them, the benefits genuinely outweigh any possible inconveniences.
Protect the agreement
To avoid having New Mexico’s standard LLC rules applied to every company, the operating agreement protects a business from undesirable rules being applied to them. The standard New Mexico rules are not unreasonable, but as they are highly unspecific, businesses are not protected from all possible scenarios.
Prevent conflicts
By having clear guidelines that all members should follow, the New Mexico operating agreement will help avoid potential conflicts. As all members should review and agree to the conditions stipulated, no misunderstandings may result in conflicts.
Information to be Included
The following information should be included when drafting a New Mexico LLC operating agreement:
Company formation
The first points to be included are the names of the company and all of the members. The basic information that defines the company should also be included, such as the goals and intentions of the business, the New Mexico elected registered agent and the location of any other key LLC documents.
Ownership
The operating agreement must also outline the ownership division of the company. Even in single-member LLCs, it must be written down, although LLCs with multiple members will benefit from this section the most. The exact percentages of business ownership can be detailed in whichever way the members agree to. This can be based on capital contribution or divided evenly among all members.
Duties of management structure
Detailing specific duties for each of the members and managers is key to the operating agreement. The document should outline all the information about the members’ functions and include how the business will be managed. As some members may prefer not to be involved with daily functions, the agreement can designate that right from the start.
This section should also specify whether the LLC is member-managed or manager-managed. If it is member-managed, then the owners should be personally making individual decisions about daily operations, whereas in a manager-managed structure, an outsider is hired to do so.
Voting rights and responsibilities
Important decisions with the co-owners will need to be made. Another common example which may occur is the event of accepting new members, changing the company’s tax classification, or even switching the management model of the business.
Business decisions will mostly require a consensus or a vote by the members, so the New Mexico LLC operating agreement typically includes members’ voting rights and responsibilities. For example, the document can specify whether all members get one vote or whether their vote is weighted based on ownership percentage. Either way, these details should be specified.
Capital contributions
The document must also outline the amount of capital that each member is investing into the business. Most likely, all parties have already agreed on these contributions before drafting the operating agreement. However, it is still important to describe the amount of cash, property, or services each member is investing in.
Taxation
Because LLCs have many options for taxation procedures, the operating agreement should describe how the company decides to file its taxes. For example, the LLC may choose to be taxed as a partnership, a C corporation, or an S corporation as possible options. While these categories can be changed further on, it is helpful to define this earlier.
Distribution of profits
One of the most important sections deals with the distribution of profits. The agreement should outline how profits will be paid out, how the percentages are determined, and what percentage of profits will go to each member. The agreement should also outline whether the company will use a calendar year or a fiscal year to divide its profits and whether or not all profits will be paid to the members.
And how much of the profits should be converted into capital? Will the owners be able to take out money from the business at will, or only on a schedule? All of these are incredibly important details that must be included in an effective operating agreement.
Succession planning
As current members will sometimes decide to leave the company due to various life circumstances, the document must outline how this process is dealt with. For example, whether other members inherit the leaving party’s ownership percentage or whether it can be sold, is an important decision. Therefore, the selling procedure should also be outlined in case the situation arises.
Buyout and buy-sell rules
Similarly, the operating agreement should describe the buyout provisions for any possible circumstance: if a member files for bankruptcy, a third party wants to buy, etc. Again, laying out these rules initially prevents future disputes from occurring.
Dissolution
Some LLCs will have a specific timeline for dissolution initially, while others will not have this goal, but a dissolution process should be outlined in both cases. The document should describe how this process can be initiated, its process, and its consequences.
Severability provision
A generic statewide clause to be included in your operating agreement is the severability provision. This clause will state that even if a different segment in the agreement is invalid, the rest of the document will not be declared inoperative.
How to File LLC Operating Agreement?
After having drafted the New Mexico LLC operating agreement, the following steps should be taken to file it:
Registered agent
An agent should be chosen to receive all legal demands that can be served to the LLC. They should be a third-party agent in New Mexico who handles this process. In New Mexico, the agent may either be a state resident or a business legally operating there.
LLC type
The next step is to know the type of LLC which is being filed. The LLC can be categorized as either domestic (forming a new LLC within New Mexico) or foreign (expanding an existing LLC into the state). If a Foreign LLC is being filed, a Certificate of Existence should also accompany the documentation.
Documents
Based on the LLC type, different documentation should be provided to the Secretary of State. For Domestic LLCs, the documents may only be filed online. However, Foreign LLCs must be filed in a physical paper format.
Fee
Different fees apply based on the LLC type, as well. To complete the application process, the state requires Domestic LLCs to include a $50 check or money order, whereas, for Foreign LLCs, it should be $100. They should be made out to the “New Mexico Secretary of State,” and the documentation should be delivered to:
New Mexico Secretary of State, Corporations Bureau, 325 Don Gaspar, Suite 300, Santa Fe, New Mexico 87501
Operating agreement
While not technically required, the application process includes attaching the operating agreement reviewed and signed by each member. Therefore, it is essential to include an operating agreement corresponding to the type of LLC (Single-Member or Multi-Member).
EIN
The Employer Identification Number is a prerequisite for the company to carry out financial transactions. This number is necessary for tax reporting and, therefore, gives a company the ability to open business bank accounts and hire employees. It can be obtained free of charge on the IRS website.
Operating Agreement Template
To draft a New Mexico LLC operating agreement, a template can prove to be very useful. These free templates are easy to adapt to any business’ needs. It includes all the necessary provisions for any legally binding contract, with a simple, intuitive format which facilitates the entire drafting process. As it is can be easily customized, it makes for a perfect baseboard for you to get serious with your business.
Frequently Asked Questions
It is not explicitly required by the state, although it is highly recommended.
New Mexico allows for the operating agreement to be drafted after filing the company’s Articles of Organization, though typically it’s recommended to do so beforehand.
Certainly, regardless of the LLC type, an operating agreement helps establish a strong foundation for the business.
Of course. However, templates like this one are often helpful, as it saves a lot of time and effort, while still being flexible and adaptable.
It is not legally required, although it is recommended. Having a lawyer revise the operating agreement guarantees its legal solidity and will prevent further issues down the road.
