Operating your business as a limited liability company (LLC) is attractive to many business owners because an LLC provides personal liability protection, meaning that your personal assets are not subject to attachment for a business judgment. Like many states, New Jersey has default provisions that govern how an LLC will operate in lieu of an operating agreement. However, these provisions enacted in 2014 under the New Jersey Revised Uniform Limited Liability Company Act (“RULLCA”) may not necessarily reflect how you want to operate your company.
For example, under prior NJ LLC law, each member of an LLC could share profits and losses according to each individual member’s capital contribution. That changed with RULLCA, which now dictates that each member is entitled to an equal share of an LLC’s profits and losses regardless of capital contributions unless an operating agreement is in place that states otherwise.
Here are three important reasons why your LLC needs an operating agreement:
- Member disputes. Operating agreements help eliminate confusion by clarifying the specific responsibilities and rights of each member, including:
- Each member’s ownership interest percentage;
- How profits and losses are allocated among members;
- Each member’s capital contribution responsibilities;
- The voting power of each member;
- How the LLC will be managed — i.e., by all members or by a member-manager;
- How new members will be added and the process for withdrawal of members;
- Voting rules;
- Buy-sell agreement for what happens when a member wants to sell his or her shares, dies, or becomes disabled.
- Harm that could arise from default rules. There are many examples where RULLCA regulations may not fit for how you and other members of your LLC wish to operate your business. For example, RULLCA states that certain actions like mergers, acquisitions, and asset sales are subject to a unanimous vote of LLC members, which could impede the growth of the company. With an operating agreement, you can customize the LLC’s operating rules to eliminate this and other concerns.
- Harm that could arise from lack of clarity. LLCs should not rely on state default rules to govern how disputes among members should be handled. Instead, an operating agreement that plans for potential scenarios preemptively ensures that members are aware of their individual responsibilities, thus avoiding potential disputes in the future.
Johnson Legal PC has extensive experience in providing legal guidance during the start-up phase of small organizations, as well as during the more mature periods of organizational growth that larger business and corporations face. Contact us to learn more about how a great corporate attorney can help your business thrive.
