Forming a New York LLC takes a lot of planning. Between the Articles of Organization, Biennial Reports, Certificate of Publication, and more, there’s a lot to consider. And paperwork and startup costs aren’t the only necessary tasks. You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the state.
That’s where the LLC operating agreement comes in.
Time-Saving Hack: There are a handful of online LLC websites that can form an LLC for you and include a free customizable operating agreement. ZenBusiness, though, is the only one that offers a free operating agreement in every package.
What is an LLC Operating Agreement?
An operating agreement gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.
Whether you’re starting a multi-member or single-member LLC, we strongly recommend completing an operating agreement. It’ll benefit and protect you for as long as you’re in business.
Am I Required to Have an Operating Agreement in New York?
Yes, New York is one of the few states that requires all LLCs to create an operating agreement. According to the New York Consolidated Laws Section 417, your company must enter into the agreement at the time that you file the Articles of Organization or within 90 days of the filing. You can draft your document prior to filing the Articles of Organization, but it won’t go into effect until you’ve officially started your LLC.
It may seem like just one more thing to add to your LLC formation checklist, but the operating agreement will prove incredibly beneficial later in the life of your business.
Benefits of Creating an Operating Agreement
You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.
It requires some legwork, but it’s well worth it. Just look at some of the benefits:
- Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
- Standardizes office and company operations to improve efficiency
- Outlines the procedures for member additions and resignations, registered agent changes, dissolutions, and more, so there is no confusion.
- Avoids New York’s “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
- Grants you greater respect from New York courts.
Free New York LLC Operating Agreement
Faced with the prospect of writing an important legal document on your own, you’ll likely start seeking out resources for guidance. Unfortunately, the Department of State website doesn’t provide official forms or instructions, so you’ll have to create your own.
You don’t have to work completely from scratch, though. There are actually a lot of great resources and free templates available online to help you structure and organize your document. While most of these templates are good options, we recommend this one, created by Northwest Registered Agent. It’s an ideal jumping off point to get you started.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:
Owner or Member Information: Names and mailing addresses.
Company Information: Your LLC’s name, registered office, and principal office.
Registered Agent Information: The name of your registered agent, their address, and contact information.
LLC Formation: The date you filed or will file your Articles of Organization with the Department of State.
Business Purpose: The type(s) of business your LLC will be doing in New York.
Term: How long your LLC in New York will be valid, typically until you file for termination.
Capital Contributions: The amount of money each member has invested in the LLC.
Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.
Ownership Percentage: How much of the company each member owns.
Management and Roles: The managerial structure and decision-making processes, naming who is in charge or certain operations.
Compensation: How members/managers are compensated and reimbursed.
Bookkeeping: Accounting procedures and member account policies.
Tax Treatment: Whether your LLC will be taxed as a Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.
Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.
Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.
Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.
Dissolution: What happens when you terminate your LLC. How your members will split up the remaining assets or debts.
You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.
When you’ve finished your draft, look over it once more to make sure you didn’t forget anything important. You’ll also need to get it approved by each LLC member in order to make it official. It’s an internal document, so you don’t need to submit it to the Department of State. Just file it with your other business documents, as you’ll likely need to review and revise it later.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in New York and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but updating your operating agreement as changes occur.
First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.
Because it isn’t recorded with the state, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.
For example: your registered agent resigns and, following New York law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the state ever has any questions.
Hiring an Attorney
Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.
Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows New York lawyers that specialize in LLCs.
Hiring an LLC Formation Service
The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring an online service like ZenBusiness or Northwest Registered Agent.
An online service like we mentioned earlier can quickly take care of all your necessary filings. Plus, they’ll create a customized operating agreement for you!
Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.
Simply having an operating agreement isn’t the end of the story; you also need to abide by New York’s guidelines for what they can and cannot do.
According to the Department of State website, an operating agreement “establishes the rights, powers, duties, liabilities, and obligations of the members between themselves and with respect to the LLC.” The New York Consolidated Laws, Section 417 expands on this, stating that the operating agreement also governs “the business of the limited liability company [and] the conduct of its affairs.” This means that your agreement can dictate nearly every aspect of your LLC. However, anything it doesn’t cover will instead be subject to the state’s default laws.
Even so, there are a number of things that an operating agreement can’t do. First and foremost, it cannot authorize actions that would break state or federal laws. Further, it cannot contradict any information included in your Articles of Organization. Nor can it exempt your LLC from state-ordained maintenance requirements like Biennial Reports. So, if you fail to submit your Biennial Reports or other required filings, the agreement cannot prevent the state from administratively dissolving your LLC. For more details on these laws, see state law Section 417 (linked above).
It might seem like a big undertaking at first, but if you follow states laws and the guidelines explained here, you’ll produce an effective, well-organized operating agreement.