Limited Liability Company (LLC) Operating Agreements

Under the law in New Jersey, limited liability companies are hybrids which combine many of the best features of corporations and partnerships.  However, to be successful, a well-drafted agreement between the owners is essential.  We have decades of experience assisting businesses with their needs.

We have several advantages, because our firm has experienced transactional attorneys, tax lawyers, and litigators.  Our transactional experience helps us to write agreements to help get the owners to agree and get the business off the ground.  Our attorneys' tax and financial experience allows us to help owners plan to maximize their profit; for example, Frank Nardi has many years of experience as a tax lawyer and certified public accountant, and he is also a certified financial planner.  Our litigation experience helps our lawyers draft agreements which avoid the conflicts that face owners of so many businesses, and to provide means of resolving conflicts which do occur.

An LLC has many advantages over corporations, partnerships and sole proprietorships under New Jersey's Revised Uniform Limited Liability Company Act.  It combines the best of each of these forms of business entities, while discarding their drawbacks.  For example:

• LLC's are "flow through" entities for tax purposes, just like partnerships. Thus, the company does not get taxed on its profits; profits are taxed only as member income, thus avoiding the "double taxation" of many corporations.
• Like corporations, however, owners of limited liability companies are protected from liability for the company's debts and judgments, as long as they are treating it as the separate entity it is.  However, if they treat the business as if it were not a separate entity, comingle their own and company funds, or sign personal guarantees for company debt, they may be held personally liable.
• LLC's can be owned by one or more persons or entities (such as other LLC, corporations).
• The "formalities" are much less stringent than in corporations.  For example, there is generally no automatic requirement for an annual general meeting of the owners and no requirement for a board of directors unless the operating agreement calls for it. The paperwork and recordkeeping requirements, while still necessary, are much less onerous than in a corporation.

Our attorneys have decades of experience helping owners draft LLC operating agreements which help them meet their needs, run profitable businesses, and avoid disputes with their fellow owners.

Limited liability companies are formed by their owners.  New Jersey's LLC law gives owners the power to write the rules which will govern their dealings and the operation of the business, and how it will be managed, any legal way the choose.  The document which does this is known as an LLC operating agreement.  When there is no operating agreement, the default provisions of New Jersey's Revised Uniform Limited Liability Company Act will control. 

While this law is generally friendly to the generic business, no business is actually generic.  Each business is different, as are its owners' needs.  That is why it is essential for the owners to take control of their destinies by writing their own “law” to govern the operating of their business and relations among themselves.

Moreover, while the owners may have a clear understanding of the terms of their agreement, memories fade and perceptions change.  It is important to have the agreement formalized in writing so everyone is on the same page about their rights and responsibilities from the start. Indeed, the process of writing out the agreement often helps the owners focus on many important they had never even thought of which will become important down the road such as voting rights, what each member's job in the company will be, capital contributions, distributions of profits, ownership interests and percentages, succession planning, what will trigger the dissolution of the business, and what happens if one of the owners decide he wants to leave the business -- will she be bought out?  can she sell her share? will the other owners have the right to match any other offer?  LLC operating agreements can also include such topics as: restrictive covenants and non-competition agreements; ownership of patents, inventions and other intellectual property rights; and conflict resolution provisions, such as negotiation, mediation, or arbitration. 

Indeed, one of the most important things we do when drafting an LLC operating agreement is to ask the question, what if…?

Almost all businesses are founded with optimism in the endeavor and trust between the owners.  Negotiating an agreement at this point is generally harmonious.  However, as time goes on, disagreements often occur.  If an operating agreement is there which sets rules for resolving these disputes, chances are high that they will be worked out and the business successfully continue.  However where the owners have not done this in advance, it is often too late and the matter may end up in litigation or with the failure of the business.

Our attorneys have significant experience helping owners reach agreement on an operating agreement which anticipates problems and sets out procedures to avoid and resolve them.  Likewise, our financial experience allows us to draft operating agreements that help to maximize the LLC's profitability.  Indeed, Frank Nardi, in addition to being an experienced business attorney,  is also a certified public accountant and certified financial planner.  Moreover, in our litigation experience we have seen many ownership disputes, which gives us insight into the problems that develop, and helps us draft agreements to avoid them.

The need for a well-drafted operating agreement does not end when the business is formed.  Businesses grow and evolve, and the operating agreement which governs the business must evolve as well.  For instance, what may have started as a small, family owned business where the two owners were the only employees may grow into a large business with multiple owners, multiple locations and many employees.  In this case, it is important that the operating agreement be revised to reflect the new reality.  Our attorneys have decades of experience negotiating, drafting and revising LLC operating agreements.

    Please e-mail us or call (973) 890-0004 for information about drafting an LLC operating agreement.