New York LLC Operating Agreement: Drafting Checklist

You’ve decided to start an LLC in New York, which requires a certain amount of paperwork. According to state law, the primary document you must file is the Articles of Organization (the LLC version of the Articles of Incorporation). Once you register with the Secretary of State, the head of the Department of State, you’ll also need to get a copy of your Articles of Organization published for six weeks in two newspapers.[1]

After publishing, you’ll need to obtain an affidavit and the Certificate of Publication, then submit those documents to the Department of State along with a $50 filing fee. You’ll then need a taxpayer identification number from the IRS. Finally, you’ll need to obtain the permits and licenses (if needed) for your particular type of business.

The described process will essentially wrap up the basics of your limited liability company. However, it won’t complete it — your LLC will also need to draft an LLC operating agreement. This applies to organizations of all sizes, whether you have a large or small business.

Unlike some other states, New York mandates LLCs to create the agreement. 

At this point, you may wonder why the operating agreement matters, especially after submitting vital documents like Articles of Organization.

Besides being an obligation under the law, the operating agreement has several benefits regarding LLC organization, structure, and certain financial matters. This agreement would be essential to your company’s foundation even if it weren’t mandatory.

This article will explore the importance and function of an LLC operating agreement. We’ll also take you through the entire process of drafting this crucial document.

Key Takeaways

• An LLC operating agreement is a crucial organizational document for your LLC structure.

• The agreement protects small business owners from LLC liabilities that may transfer into personal liabilities.

• As a legal document, the operating agreement is required to launch an LLC in New York.

• You must draft the agreement correctly to provide the desired benefits. It’s always recommended to hire a professional service for optimal results.

What Is an LLC Operating Agreement?

The operating agreement is a necessary legal document when forming an LLC in the state of New York. However, your LLC operating agreement would be essential for business, even if optional. Creating the agreement is highly advisable even in states that don’t require it by law.

The reason for this is relatively straightforward. Much like the Articles of Organization, the agreement is a foundational document and, as such, instrumental in LLC formation. The document defines precisely how the limited liability company will operate and outlines the roles of crucial LLC members.

The formative role of the operating agreement can’t be overstated. Its purpose is to establish coordination between various facets of decision-making and structure the basic financial construction of the LLC. To a degree, this document is as significant for proper LLC operation as the Articles of Incorporation. The operating agreement provides a clear direction for the company.

LLC members are responsible for creating and adopting the agreement. The owners and members of the LLC decide on the exact rules the company will adhere to. Once the members reach an agreement, they sign the document, making it valid as an internal guideline.

The operating agreement covers many details of LLC operations:

• Percentage of the company belonging to every individual member

• Voting rights of LLC members and how they exercise them

• Personal responsibilities that every member holds

• Duties of company managers and members, regardless of their exact roles in the LLC

• Powers for members and managers

• Distribution of the LLC’s profits and losses

• Time, place, and model of member meetings

• Procedures through which members can transfer interest

• Practices in the case of a member’s death

State Requirements

The laws of the state of New York require new LLCs to get their operating agreements in order before beginning to do business in the state. According to the New York Department of State, you can enter this agreement before submitting your Articles of Organization, either at the same time or 90 days after you’ve filed the foundational document.

Interestingly, New York state laws don’t require LLCs to submit the operating agreement to the Department of State. The official DoS website states that the agreement is not filed with the state service. Although mandated, the document is viewed as internal.[2]

LLC Operating Agreement Benefits

The document provides plenty of value to any LLC that drafts and accepts it. It might be semi-mandatory, but this internal document is absolutely worth adopting.

Firstly, the operating agreement draws a clear line between the owners and members of the LLC and the company itself. In other words, your LLC becomes a business entity in its own right, with debt and liabilities completely separated from your assets. Once this relationship is defined this way, you will be much less likely to bear the responsibility for the company’s shortcomings.

If you have some knowledge about how LLCs work, you might think that these two liability types — company and private — are already established. However, the practice is quite different. Sometimes, the separation between the organization and the individual owners can be blurred by circumstance.

In such cases, a significant part of financial and legal responsibility may fall onto the members of the LLC. The situation is even more complex if the company has a single owner. Then, the company structure could even be interpreted as a sole proprietorship for legal purposes. Sole proprietors carry full responsibility for their enterprises.

With a correctly written operating agreement, these situations won’t arise. That’s only the first benefit of this agreement.

Next, a business entity with a concise operating agreement will have fewer issues executing its business plan. The agreement will consolidate the company’s topmost resources, particularly membership and managerial staff.

The advantage here is the strict set of rules within the document. With clear organization, there’ll be less confusion when executing critical company operations. This is particularly important because the entire organization can fall into disarray if the internal structure fails. This can negatively impact morale, crucial processes, and work efficiency.

One less obvious advantage of having an operating agreement has to do with your LLC’s bank account. Financial dealings become much easier, especially when working with banking institutions. It’s customary with many banks to require the operating agreement from companies to grant them a loan. Although this doesn’t have to be the case 100% of the time, having the agreement will cover that aspect of dealing with banks.

Lastly, the operating agreement opens up some enticing taxing options. When LLC members work in agreement, they may decide whether their organization should be viewed as an LLC, partnership, or corporation for income tax purposes. This can be a prudent business move that saves considerable resources, especially in the long run.

With all of the above, one factor will determine whether you gain access to the mentioned benefits. The operating agreement must be written in line with your business setup and done legally.

Therefore, consulting a professional for legal advice is always a good idea. Better yet, you can work with an experienced service like Swyft Filings to circumvent the complications and complete your operating agreement without issues.

Who Needs an Operating Agreement?

According to the state of New York, only LLCs are required to have an operating agreement. This obligation is tied to the place of business rather than the LLC’s state of origin. In other words, every LLC formed in the state of New York should have the agreement, and the same goes for foreign LLCs, i.e., those formed in a different state but doing business in New York.

Outside of LLCs, businesses don’t need an operating agreement. This means that C, B, and S-Corp formations and business entities like sole proprietorships may conduct business without the agreement. With those organizations, formative documents like Articles of Incorporation will suffice, while LLC formation will demand the operating agreement.

Small business owners follow the same convention as larger LLCs regarding operating agreements for business formation. Owners should have the internal document in place regardless of whether your LLC has a single member or an expansive board.

We’ve already mentioned one case in which solo owners would be better off creating the agreement: single-member LLCs may be legally equated with sole proprietorships, which completely changes their outlook regarding company vs. individual liability.

If an LLC functions without an operating agreement, the organization may be required to operate under state default rules defined by the state of New York. While this doesn’t sound like a poor solution in concept, these default rules are too generalized in practice and don’t offer enough flexibility and customization.

Drafting Your New York LLC Operating Agreement

Now that you understand the operating agreement and how it impacts your business, it’s time to see how you should draft the written operating agreement.

In essence, the process is relatively simple as you don’t have to bother with filing the agreement with the Secretary of State at the Department of State or deal with filing fees. Also, the information you must include in this legal document is most of the basic info already listed in your Articles of Organization.

If you know what you’re doing, creating the document from scratch isn’t particularly difficult. However, there’s an even easier way. You can find an LLC operating agreement template online, which will shorten the process considerably.

Here are the provisions you should include in this organizational document or fill out on an online template.

Step 1: Provide Business Information

As stated before, the business information you need to share is mostly what you’ve already included in the Articles of Organization for your LLC:

• Name of the company

• Place of business

• Service of process

• Registered agent

• Employer Identification Number

So far, so good — entering this data is relatively straightforward. It shouldn’t come as a surprise that the rest of the process will be a bit more complex.

Step 2: List LLC Members

Although listing your LLC’s members may seem like a pretty easy step, it’s one of the critical points in this process. Listing the members of an LLC brings several benefits:

1. The list confirms a clear differentiation between the members and their personal assets and liabilities directly tied to the company’s affairs. Simply put, the list safeguards against LLC liabilities spilling into personal liability.

2. The ownership percentages and interests are precisely defined, solidifying how much of the LLC each member owns. This also describes individual company members’ particular roles and responsibilities. However, this doesn’t mean that only multi-member LLCs will reap this benefit — single-member LLCs will have some advantages here, too.

3. Business owners get clarity on ownership interests, member contributions, and the exact roles and obligations of the members.

The list of LLC members makes everything from members’ ownership and membership interest to personal assets transparent and uncomplicated. Once new members arrive, they’ll also understand their member’s share more clearly. This aspect of the operating agreement is vital for all new businesses and startups.

Step 3: Decide Member-managed vs Manager-managed

The company operating agreement defines two possible types of management structure: one managed by members and the other by managers. If there’s a company owner ready to take on a leadership position, one such member can become instrumental in the affairs of the company, both day-to-day and long-term.

On the other hand, a manager acting on behalf of the company can handle LLC management. In other words, this isn’t a member but an employee in an executive role. Small, single-member LLCs can follow the same two models.

Step 4: Lay Out Administrative Operations

Administrative operations include an expansive list of tasks and activities that cover everything from finances to membership functions:

• Initial capital contributions

• Allocation

• Day-to-day admin

• Member voting rights

• Business plan implementation

• Distributions

• Internal revenue services

Additionally, as defined in the internal document, administrative operations deal with company affairs like the Internal Revenue Service, Division of Corporations, tax returns, and controlling the organization’s bank account.

In this section, business owners can customize their approach to address the company’s specific needs. Admin operations are often led by a designated employee or hired expert with written consent to act on behalf of the company.

Step 5: Add and Remove LLC Members

The final step in drafting your operating agreement involves changes in membership. This section concerns business owners, new members, and additional members of an LLC.

In particular, this part of the internal document covers cases of buyout, indemnification, member contributions, ownership percentages, and restructuring of the remaining members. A new member can gain clear guidelines regarding their membership interest and voting rights.

For example, accepting several new members simultaneously is possible only if they provide written consent. If the dealings around the members of the LLC are clearly defined in the operating agreement, these cases will be straightforward every time.

It’s worth mentioning that a single-member LLC can benefit greatly from paying attention to this section. Clarifying the membership questions will enable growth by taking in new members and expanding the company.

Since membership maneuvers can be complex, taking legal advice when working out this section would be wise.

Create Your Operating Agreement Through a Filing Service

Creating an LLC operating agreement will be somewhat complex, at least if you intend on making a document that will serve its purpose to the best of its ability. You’ll have many aspects to consider and various legal puzzles to resolve. This will be true for all business owners — those starting a small business or launching a large organization in New York.

If all that sounds daunting, Swyft Filings is here to offer assistance. Our services are tailored for getting new businesses off the ground, and we can have your LLC in New York up and running in a considerably shorter time than if you would take the entire process upon yourself.

Swyft Filings helps business owners starting from scratch and companies who have already submitted their LLC filings.

Are you in the first category? Start your business off on the right foot. File for your LLC through us today and include our LLC operating agreement add-on in your cart to ensure you have all your necessary documents at the outset.

We also have you covered if your LLC formation is already on the way. If you’re looking for the next step after forming your LLC, our LLC operating agreement service ensures you have a compliant document for conducting business in New York. We can help you wrap up your legal documents so you can get going as soon as possible.

Our services help those who want to avoid extra complications and expenses. Some of our services only require you to cover the filing fee and nothing more.

With Swyft Filings, you won’t need to spend unnecessary time and money. Instead, focus on what you do best and let us take care of the rest.

FAQs

Is an LLC operating agreement required in New York?

According to the laws of New York, LLC members must adopt an operating agreement before the company can start doing business. However, no legal consequences are incurred if an LLC doesn’t adhere to this rule.

How does an LLC operating agreement help protect my assets?

An operating agreement determines the boundaries between your LLC and its owners and members. The agreement makes transferring any business liabilities into personal liabilities nearly impossible.

Who needs access to this document once it’s drafted?

When you draft an operating agreement, the members of your LLC will require access to it for consolidation. Having the document available to the company’s decision-makers will ensure there are no discrepancies in interpreting the agreed rules.

How do I edit information on this document if membership changes?

The currently existing membership makes all decisions related to the operating agreement by voting. Therefore, editing specific information in the document won’t be complicated, even if the membership consists of many people.

What other legal documents do I need drafted for my New York LLC?

To file an LLC in New York, you’ll need to register with the New York Department of State, have an Employer Identification Number (EIN), and have any business licenses or permits applying to your business.[3]

Bibliography

1. New York State. “Forming a Limited Liability Company in New York.” Accessed June 7, 2003.

2. New York State. “Articles of Organization for Domestic Limited Liability Company.” Accessed June 7, 2003.

3. NYC Business. “Employer Identification Number (EIN).” Accessed June 7, 2003.