As you register your company, you will be made aware of all the rules and regulations that apply to you at the state and federal levels. Complying with these stipulations when forming a New Jersey LLC ensures that you do not fall out of good standing with the authorities. However, these rules only govern you from an external point of view. As a New Jersey limited liability company (LLC), you must also have internal rules that apply to your operations in the form of an operating agreement. We will cover why having such a New Jersey operating agreement, abbreviated as OA, is important:
What is an LLC Operating Agreement?
Every organization abides by different rules. When you first start a company, you may not pay much attention to what rules you want in place. However, once you start growing and getting more money, it’s easy for disagreements to ensue over official procedures and member responsibilities. If you already have some rules in place, you can tell who is on the wrong and clear up the issue fast. Additionally, if you are ever in court, you can use the membership agreement as a guiding tool on who will take the blame. People also find themselves in court to argue their rights in the organization and where this happens, an operating agreement comes in handy. For example, if you feel entitled to 20% of the shares and yet other members want to give you 10%, you can use the Operating Agreement as a basis of the sharing terms.
Is an Operating Agreement required in New Jersey?
Per the New Jersey Statutes, you do not need to have an Operating Agreement. However, to ensure you can run your New Jersey LLC with fewer hiccups along the road, it’s best that you agree on some ground rules on standardizing procedures. Plus, it ensures that if you ever go to court, you will not be subject to New Jersey’s default rules laid down by the authorities.
Benefits of Creating an Operating Agreement
Given that an Operating Agreement is not required by the authorities, you may feel tempted to brush it off as you set up an LLC. However, before you do, please consider the following benefits:
- It shows how you own the company and ensures you do not disagree about this in the future once the money starts rolling in.
- It ensures you have set standards on how you will run the company operations. Less time is spent delegating and explaining tasks as everyone is already clear on what they should do.
- It provides a basis for adding or removing members from the organization and member additions and resignations so that you can avoid disagreements. It also includes hiring practices and how you will end the operations if it comes to that.
- It allows you to avoid falling victim to New Jersey’s default rules which are largely in part disadvantageous to organizational members.
- It ensures that the New Jersey courts treat you better and with more respect if you ever have a disagreement. They will see that you already have some rules in place and will work towards helping you get a better outcome.
How to draft a New Jersey LLC Operating Agreement?
Creating an LLC Operating Agreement might look like a challenge, more so to a business person who has not made one in the past. Here is what you need to include:
- Who owns the business, what are their names, and where can they receive their mail?
- What is the name of the LLC in New Jersey, and where does the organization have its primary office?
- What is the name of the person or company representing the organization, where can they receive mail, and how can they be contacted?
- When did you form the organization or when do you plan to do so?
- How long do you plan to be in business?
- What are your operations and what kind of activities will you engage in?
- How much has everyone brought in and how much of the organization do they own?
- How will you share your profits, losses, income and debts, and other monies?
- Who will be in charge of the operations and who can take part in decision-making processes?
- Will managers receive any monies and if so, how much?
- Who will be in charge of accounting and how will you pay your taxes?
- Will you add any people to the organization and if so, how will you do it?
- How will you handle members leaving the organization?
- What procedures are in place to make changes to the Operating Agreement?
- Will you terminate your operations and if so, how will you share out the assets?
Hiring an Attorney
While drafting an operating agreement by yourself is possible, you can miss out on details that can render the document disadvantageous to you. Working with New Jersey lawyers that specialize in LLCs can help you avoid this. Consider hiring an attorney which might cost you a lot, but in most cases, you will pay a flat rate and get your document.
Hiring an LLC Formation Service
Did you know that New Jersey LLC formation services such as ZenBusiness and Northwest Registered Agent also offer Operating Agreements as part of the LLC formation process? All you need is to hire them to form your company, and they will throw a customized operating agreement in as part of the bonus. Plus, it costs much less than hiring an attorney and you can avoid making mistakes with this crucial document.
Where is an Operating Agreement filed?
Here is some welcome news. Unlike other documents that you have to file with the state, your New Jersey LLC Operating Agreement is your property and you can store it as you wish. It’s better to make sure that every LLC member has a copy of the document and has one in your company records. You can all refer to it as needed and if you ever show up in court, you can produce it as evidence.
Making Changes to Your Operating Agreement
It’s inevitable that as you start and continue doing business in New Jersey, you will make some changes to your structure. You will discover areas that need more work, areas you missed out on, and areas you need to amend. You can always go back to the original document and make the changes. The good thing is that it only affects your organization and does not need a nod of approval from the authorities.
In your document, you will have already outlined who must agree to the changes to update an Operating Agreement. In most organizations, all LLC managers/members must agree to make the amendments. However, in some organizations, only a select few are necessary to initiate such changes. You need to be clear about this when drafting the original document to avoid squabbles in the future.
You can make the changes as seen best and store the new document in your records. It’s better to keep the old ones to make it easier to track your changes where necessary. Also, remember to update your records with the bank and any other institutions where you have used the original copy.
References
As a first-time business owner, it can be hard to understand what you may and may not include in your agreement. Luckily, The New Jersey Statutes, Section 42:2C-11 – is clear on what you can leave out and what you should avoid putting in the document. The areas you must cover are relationships between the owners, how you will handle your tasks, and how you will carry out your business. These are the building blocks of any company and leaving them out would be detrimental to your success.
It’s easy for some people to use the LLC’s operating agreement as a way to exercise more control than they should over the others. The law recognizes this and has put some limits to your agreement. It cannot exempt you from complying with the law. For example, you cannot use the document to enforce illegal operations in the business. Neither can you refuse to comply with annual filings because you have stated this in your document. Thus, you need to be aware of how much power the agreement holds and where it stops.
Ultimately, whether you are subject to generic laws or not, the state of New Jersey will have the final say on what happens in your business in New Jersey. Thus, make sure that you only include aspects that would hold up in a court of law.