A New York LLC Operating Agreement is defined as a legal document used by an LLC structured entity to document how a business will operate by outlining the duties, rights, and authority assigned to the members and any other relevant information such as ownership.
All New York LLCs, single-member and multi-member are required by state law to have an operating agreement. An operating agreement communicates the business structure and purpose of the LLC as well as the operating regulations agreed by all the members. Additionally, it strengthens the company’s limited liability status, thus creating a clear distinction between the LLC and the owners and their assets.
A New York LLC operating agreement is legally binding to the LLC members (owners). The following laws govern the preparation of a New York LLC operating agreement:
Operating Agreement Laws: § 417
Consolidated Laws of New York: the Limited Liability Company Law
State Definition: § 102(u)
Types of Operating Agreement
A New York LLC operating agreement can either be a single-member or multi-member operating agreement depending on the type of LLC business at hand. These are defined as:
Single-member LLC operating agreement
A single-member LLC operating agreement is crafted for LLC businesses owned by a single owner/member. The operating agreement protects the owner such that in its absence, state law stipulates that any business debts and lawsuits fall to the LLC owner.
Download: Microsoft Word (.docx)
Multi-member LLC operating agreement
A multi-member LLC operating agreement is meant for LLC businesses owned by more than one member. A multi-member LLC operating agreement outlines how all the members have agreed to run the business.
Download: Microsoft Word (.docx)
Reasons for Operating Agreement
One of the reasons LLC businesses in New York should consider having an operating agreement in place is that it allows LLC members to have independence in running their company. The members get to decide the procedures, rules, and management structure of the LLC.
Additionally, through the operating agreement, each member’s expectations can be presented such that they are all in sync in regards to what they want to achieve. The primary reason why New York LLCs should consider having an operating agreement is that the state dictates that all LLCs should have one.
An operating agreement is mandatory for all LLCs based in New York according to New York Statutes § 417.
An LLC is expected to protect its members’ limited personal liability from the company’s financial and legal obligations. The US SBA (Small Business Administration) states that having an operating agreement strengthens this limited liability status of the company.
An operating agreement is also requested by external parties such as creditors as proof of the legitimacy of the LLC when it is to open bank accounts or apply for loans.
Importance of Agreement
Now, how does an operating agreement benefit a New York LLC entity? First, an LLC is necessary for operating an LLC in the following ways:
- A New York LLC operating agreement protects the LLC from being managed using default New York LLC state laws. Without an LLC operating agreement, a New York LLC would be subjected to generic state laws which may not cater to the specific interests of the owners. Using an operating agreement ensures LLC members have more control over their business.
- An operating agreement can be an essential management tool as it can be consulted how different scenarios within the company are to be addressed in the future. In addition, it ensures harmonious co-existence between LLC members, managers, and employees.
- An operating agreement ensures that members’ and managers’ roles and responsibilities are clearly spelled out in writing and consequently reduces internal disputes within the company.
- An operating agreement increases the credibility of an LLC entity and further strengthens its limited liability privilege in New York. This way, it can be used by third-party organizations such as banks, courts, investors, creditors, and government agencies to authenticate the LLC.
Information to be Included
Due to the variations in people’s expectations, preferences, and circumstances of running an LLC entity, operating agreements will usually differ from one business to the other. However, even though the specifics of each operating agreement vary, the contents can be broadly categorized as discussed below:
The official name of the LLC needs to be declared as it appears on the Articles of Organization. The name must have the term “Limited Liability Company” or its abbreviations “LLC.” The business name must be permitted for use in New York.
An operating agreement is expected to declare all the LLC members and how the ownership of the LLC has been shared among the company owners. The sole owner will ordinarily have full ownership in a single-member LLC, unlike in a multi-member LLC. It can be distributed based on initial capital funding or other metrics such as influence, etc. LLC members can be individuals or organizations such as other companies.
Each LLC adopts a management structure that best suits its needs and objectives. The selected management structure must be clearly defined, and critical management individuals must be identified. A New York LLC can be member-managed or manager-managed.
Duties of members
Different people within the LLC will have different powers and responsibilities. The powers and duties assigned to each member or manager should therefore be cleared. The responsibilities of key people in the LLC are essential to define to avoid misunderstandings and enhance accountability.
Voting rights and responsibilities
There are issues within a business that will often require a voting exercise for them to be addressed. Therefore, a New York LLC operating agreement needs to state voting decisions for implementation and how voting will be conducted. In addition, the voting rights awarded to each member and the factors used to award them should also be clarified.
Distribution of profits
Profits and losses are a fundamental part of running a business. In a multi-member LLC, they are often equally distributed among members. The operating agreement should declare how the profits and losses are distributed among the members in a particular LLC to avoid conflicts in the future.
A New York LLC operating agreement needs to illustrate the procedure for holding meetings within the specific company. The meetings schedule and protocols must appear in the document to ensure important decisions and information are effectively conveyed to each LLC member.
Buyout and buy-sell rules
It is not rare that new members may want to join once an LLC has been formed, while some existing members may want to leave the company. An operating agreement should state the protocols for the addition or removal of members. For example, the addition of new members will often have to be approved through a vote, and the new member will be asked to pay a specified amount of money for an entry.
Contrary, departing members will usually have to be compensated for relinquishing their ownership. Events such as death and retirement can also result in a member leaving an LLC; the operating agreement should therefore state how such events are handled in terms of transfer of ownership.
Dissolution of the LLC
It is good to anticipate a case where the LLC has to be dissolved. Therefore, an operating agreement must define the procedure for dissolution and address how assets and debts will be handled at the time of dissolution. Usually, the decision to dissolve an LLC has to be determined through a vote. The person assigned to coordinate the dissolution must also be identified in the document.
Modifications to an operating agreement are generally inevitable. Therefore, the document must indicate the procedure in altering, removing, or adding the operating agreement’s contents. These modifications will usually require a vote by the LLC members. Therefore, it should be definite how many votes are needed for the modification to be done.
Operating Agreement Template
LLC members can create a New York LLC operating agreement using a template. Templates make the process more straightforward for users to come up with effective operating agreements. Readers can download free New York LLC operating agreement templates here that are professionally designed to cover the primary contents of a standard operating agreement. Download now to get started!
How to Form Operating Agreement?
An LLC structure of business ensures the company owners are exempted from the company’s financial and legal liability. Therefore, once members have decided to establish an LLC in New York, there are several steps they can follow to ensure they are compliant and legally allowed to operate as an LLC. They include:
Find an agent
To begin setting up the LLC, the members must have a distinguishable business name filed with the State Department, Division of Corporations through an Application for Reservation of Name, which costs a $20 filing fee. The member should then appoint a registered agent with a physical address in New York to receive notices and documentation on behalf of the LLC. A registered agent can either be a person or a business.
The members should fill out an application that suits the type of LLC in question. An LLC can be domestic or foreign. Domestic LLC files the Articles of Organization while foreign LLC completes an Application for Authority to operate in New York. In addition, foreign LLCs will have to provide further documentation such as a Certificate of Existence.
The applications fees are then paid to the New York Department of State, Division of Corporations. Domestic LLCs pay a fee of $200, while foreign LLCs pay $250. Paper applications and payments should be forwarded to:
The State Department, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231.
Once the LLC’s Articles of Organization have been filed, a copy of the document or a notice of the formation of the LLC company must be published in at least two newspapers within 120 days. The newspapers are to be selected by the county clerk of the county where the LLC primary offices are located. Each publisher must then provide an affidavit of publication.
Upon receiving the affidavits of publication, a certificate of publication should be filled out and submitted to the New York State Department, Division of Corporations, together with copies of the affidavits. A filling fee of $50 is applicable for all applications.
Next, a New York LLC operating agreement must be prepared under New York state laws. All LLC members must then sign the document, and each member should be given a copy for safekeeping.
Lastly, other tax and regulatory requirements should be fulfilled before the LLC can become operational. For example, an IRS (EIN) Employer Identification Number must be obtained for LLCs for all multi-member LLCs regardless of whether there are no employees. Single-member LLCs apply for an EIN only if there will be employees.
The LLC should then apply for any other applicable business licenses which vary from one industry to another. All New York LLCs are subjected to an annual filing fee paid to the New York Tax Department through Form IT-204-LL unless the LLC has been filed to be taxed as a corporation. The annual fee ranges from $25 to $4500, depending on the LLC’s annual revenue.
Frequently Asked Questions
No. An operating agreement is a regulatory document used by LLC members to lay out how they intend to run the company and corporate with management and employees. Conversely, Articles of Organization is a registration document used by LLC members to register an LLC company with the state they intend to operate.
A New York LLC operating agreement is not filed with the state or any government agency. Instead, it is an internal document that is kept by each member and with company records too.
To register an LLC’s Articles of Organization costs either $200 or $250 depending on whether it is a domestic or foreign LLC, foreign LLCs being more expensive. An additional $20 can be applied if the chosen business name has to be reserved before the LLC can be registered. If lawyers are hired to undertake the entire process, this cost can increase to hundreds or thousands of dollars.
Yes. You can create your LLC operating agreement. However, caution must be taken when presenting information to ensure it is legally enforceable as a legal document. Due to this fact, hiring a business attorney to prepare the document is sometimes considered a better option.
No. New York state laws do not dictate that a lawyer must be used to write an LLC operating agreement. LLC members can negotiate among themselves and come up with a practical and legally enforceable operating agreement.