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Why having a thorough operating agreement is important

On Behalf of | Apr 22, 2022 | Business Law

When business owners in New Jersey start a new business, they will go through the process of determining what is the best business structure for their business. They could incorporate, set up a limited liability company (LLC), have a partnership and others. One popular option for companies is to start an LLC. To officially start the company, they will need to file the Certificate of Formation with the Secretary of State. However, that just creates the legal business entity, it does not determine how the business will be run.

The day-to-day operations will be done by the members of the LLC, but there are times when disagreements arise on particular issues. The certificate of formation will not help guide them in these situations. How the company will be operated is determined in a document called the operating agreement. This document is what the members can turn to when they have disputes and a properly written operating agreement can save time and energy spent on future disputes.

Elements of an operating agreement

Operating agreements set the rules for the internal operations of the business, which can include:

  • The percentage of ownership that each member has in the LLC
  • The voting rights of each member
  • When member meetings will be held, the process for scheduling and how voting will occur at the meeting
  • State how profits and losses will be distributed between the members
  • State who will have the various management positions within the company
  • Rules for buyouts, buy/sell agreements and passing ownership rights on through inheritance
  • How the company will be dissolved

This is not an exhaustive list of everything that can be included in an operating agreement in New Jersey. Each company needs to draft it based on the companies’ structure and needs. By having all of these issues in writing and adopted by the members, everyone will know exactly what to expect and how to handle disputes. Experienced attorneys understand the elements that companies may need in their operating agreements and may be able to help guide the company through the process.