You’re in for exciting things ahead with your new business. And you might even be ready to fill orders and book clients or open doors and let customers in.
However, before you can get started with your limited liability company (LLC), you will need to take care of things like business registration, licenses, and an Operating Agreement: the sort of cumbersome yet necessary part of your business formation.
In particular, think of your Operating Agreement as your new best friend. It will serve as your road map to your business destination. Having this, especially if you have co-owners in the LLC, will lessen stress and arguments. You only have to reference it to see who can take home how much of the profits, who needs to do what in the business, and all that fun stuff.
Below are information and guidelines to help you write your Operating Agreement, including the reasons you need it, what you need to include, and when to revise it.
What is a Nevada LLC Operating Agreement?
An Operating Agreement is a document drafted by the members (owners) of an LLC during the first stage of the formation process. Most LLCs choose to create it when they file their Articles of Organization with the Nevada Secretary of State. Its purpose is to govern the internal affairs of the company, and by doing so, it also strengthens the flow of information within the LLC.
Once all members have agreed and signed the Operating Agreement, it becomes a legal contract. The original copy is to be filed with official company records, and copies are given to members.
An Operating Agreement for a Nevada LLC is not required by law. But as it will be the only written proof binding the members to agreed-upon rules and regulations regarding the management and operation of the business, you are strongly encouraged to create one.Since you don’t need to file your Nevada LLC Operating Agreement, you don’t have to pay a fee. But there are fees and required documents for your LLC that you should remember to file and pay yearly. These include the Annual List of Managers or Members/Business License Application. The Annual List fee is $150, and the fee to renew your business license is $200. The total annual fee to renew your Nevada LLC is 0.
Why do I need an LLC Operating Agreement in Nevada?
An LLC is a popular business structure. This is probably because of its flexibility, limited liability protection, and fewer formal requirements. When you create a written Operating Agreement, it further cements those advantages.
An Operating Agreement is an internal document that allows you, as members of the LLC, to shape your working relationship with each other according to your wishes. It also gives your company credibility when you apply for business bank accounts or loans.
The benefits of a Nevada Operating Agreement include:
- Further protecting the limited liability status of the business: Establishing a business identity distinct and separate from its owner is mostly achieved through the limited liability company business type. But having an Operating Agreement will give you that extra layer of protection to help ensure that your limited liability status is upheld by court officials if, unfortunately, you ever come to that.
- Clarifying verbal agreements: If you are starting a multi-member LLC, you’ve probably already discussed some details of your business with your potential co-owners. But even if you think you’ve already hashed out the details, and everybody has agreed, a written Operating Agreement that’s legally binding is still the best way to go. Running a business is exciting, but it’s also a huge endeavor. Disagreements can arise even if you are going into business with people you know and trust. A clear set of guidelines to resolve disputes will save you from headaches down the road.
- Protecting your agreement in the eyes of the state: The state of Nevada has set standard rules to govern LLCs. These default laws aren’t necessarily bad rules, but they may not be what members of your company agreed on when you started the business. So, you need an Operating Agreement to spell out your wants. Without establishing certain rules for your company, the default laws of the state of Nevada will fill in the gaps.
- Establishing internal transparency: For LLCs, an Operating Agreement provides a clear outline of managing the business, raising additional capital, and expansion, which is what investors and lenders want to see.
What do I include in my Nevada LLC Operating Agreement?
Having a well-written, comprehensive Operating Agreement is a great foundation for your company. Because aside from the benefit of established management rules for your business, it provides a clear definition of every member’s roles, duties, and responsibilities. All of these benefits of a Nevada LLC Operating Agreement help ensure that your company is set up and managed the way you want it to be.
Some items you may want to include in your Operating Agreement are:
- Company Formation
- Powers and Duties of Members and Managers
- Voting Rights and Responsibilities
- Capital Contributions
- Distribution of Profits
- Succession Planning
- Buyout or Buy-Sell Rules
- Holding Meetings
- Single-Member LLCs
- Severability Provision
1. Company Formation
The first section of your Operating Agreement will contain basic information about your company, which includes:
- The legal name of the company
- The names and addresses of each member
- Your Nevada registered agent and registered office
- Management structure of the company
You’ll also need this information for your Nevada Articles of Organization, so it’s a good idea to draft your Operating Agreement around the same time you file your formation documents.
One relevant point that your Operating Agreement should have is the breakdown of membership interest in the business. If you are a single-member LLC, you own 100% of the company. But even if it’s implied, you must include it in writing, too.
For multi-member LLCs, this section of your Operating Agreement will discuss how you will calculate each member’s ownership in the business. For example, you may decide that even though members will invest different amounts in raising the initial capital needed, the company will still be divided equally among yourselves.
Or, if you decide that membership interest in the business will depend on each member’s contribution of cash, property, or services, you’ll have to specify that in the Operating Agreement, as well.
3. Powers and Duties of Members and Managers
Management of the business and the definition of the powers and duties of members and managers are topics where the default laws of the state and the Operating Agreement clash the most. And that’s to be expected because no two people are alike, so it follows that their management styles and needs will also be different.
Having said that, the default laws of the state favor member-managed LLCs. So, if you don’t specify in your Operating Agreement whether your LLC is member-managed or manager-managed, the state will assume and expect that your company is member-managed.
It is not an unreasonable assumption because most LLCs are set up by entrepreneurs with small businesses, where the owners are also the employees.
However, there will be situations where a member-managed LLC is not practical, such as when the number of LLC members is relatively large, or members don’t wish to be involved in the day-to-day operations of the business.
If your company will be manager-managed, you’d have to describe the following in your Operating Agreement:
- How the managers are appointed or hired
- What qualifications a manager should have
- Who approves the appointment or hiring of a manager
- What duties and responsibilities a manager would have
- What a manager can decide on
- What business decisions need the votes of members
4. Voting Rights and Responsibilities
Although an LLC is not required to hold annual meetings and keep detailed minutes like corporations, there may still be business decisions that members need to vote on. This includes bringing in a new member, expanding the business to a new location, or needing to switch from a member-managed company to a manager-managed business model.
The two common ways that members choose to divide their voting powers are:
- Each member gets one vote regardless of their ownership percentage
- Each member votes according to their ownership percentage in the business
Most of the time, members of an LLC choose to assign voting rights according to membership interest. This means that a member who has a 50% interest in the business holds the majority vote.
No matter what method you choose, make sure to specify it in your Operating Agreement. You should also include whether a majority vote is enough to pass a motion forward or if a unanimous decision is required at all times.
5. Capital Contributions
After you’ve filed the Articles of Organization for your Nevada LLC, the next order of business is to gather capital. This is what members can or will contribute to the company, which was probably one of your first considerations before deciding to form an LLC.
It is an important discussion, both for your business and as a component of your Nevada LLC Operating Agreement. Because aside from the fact that you need capital to start your business, the percentage of profits allocated to each member is often based on their capital contribution. Sometimes, even the voting power of an LLC member is proportionate to their initial capital contribution.
The most common forms of contribution from members are cash, property, and services. And even if you have a copy of a bank statement showing that a member contributed $10,000 to the business, you still should expressly mention it in your Operating Agreement.
LLCs, as a business structure, are often described as flexible because they allow entrepreneurs to choose how their companies are taxed. The IRS, by default, classifies a single-member LLC as a sole proprietorship, and multi-member LLCs are taxed as partnerships. But LLC members may elect their company to be taxed as a C corporation or an S corporation at any time.
Sole proprietorships, partnerships, and S corporations are pass-through entities. This means the IRS treats the owners and the company as one. Pass-through entities allow owners to claim profits and losses, credits, and business deductions on their personal tax returns without the business being taxed separately beforehand.
However, there are some eligibility requirements for LLCs to be able to elect S corporation status, such as:
- You have to be a domestic company
- You have less than 100 members
- Your members are mostly individuals, certain trusts, and estates
Before you choose to change the tax classification of your business, it is advisable that you consult with an accountant or a tax professional. Whichever you decide as members, it should be included in your Operating Agreement.
7. Distribution of Profits
This section of your Operating Agreement is where you assign member percentages of the business’s profit.
To help you draft clear guidelines on the allocation of business profits to the members of your Nevada LLC, try to answer the following questions:
- Will the company follow a fiscal year or a calendar year?
- Will profit payouts be made regularly, or will the members be able to draw at will?
- How will profit percentages be determined?
Whether you are a single-member or multi-member LLC, you might need to consult a tax professional to figure out your financial needs and tax brackets and which profit allocation will work for you.
8. Succession Planning
The Nevada Revised Statutes states that the interest of each member in an LLC is personal property, and it is governed by the default laws of the state if there are no provisions for its regulation in the Articles of Organization or the Operating Agreement.
To avoid being subjected to the default laws, your Operating Agreement should prepare guidelines if a member decides to leave the company. There are commonly two options that a member can do with their portion of the business. They may transfer all or a portion of the membership to another member or sell the interest of ownership to other members, individuals, or companies.
A set guideline to follow in case a member decides to withdraw from the company will help you avoid problems, such as having to welcome a new member you haven’t vetted. To make the process transparent and easy for all involved, you could include the following provisions in your Operating Agreement:
- Whether current members can be given the right of refusal before the sale is offered to external buyers.
- Whether the price for a membership sale will depend on the market value of the owner’s interest in the business.
- Whether members can only sell or transfer their percentage of the company to individuals accepted through voting by the remaining members.
The Operating Agreement should also include guidelines in case of a member’s death or incapacity. Add a description of whether the ownership will be distributed to other members and how the state will be paid if members will not be allowed to transfer ownership to their estate or legal representative. You must also put in writing if you want the company dissolved in case of a member’s death.
Your Operating Agreement can also include steps that a member should follow to announce their withdrawal from the LLC:
- A written notice to other members with the date, time, and other details of the withdrawal
- Statement on whether the member wants to transfer or sell ownership
- A request from members to approve the withdrawal
- Accept compensation for sale or complete transfer
- Sign withdrawal documents and receipt of payment
9. Buyout or Buy-Sell Rules
The purpose of your Operating Agreement is to manage the present and prepare for the future of your company. And although you are still in the formation stage, it’s a good idea to add provisions for events such as adding a new member or if a member dies or becomes incapacitated.
Your Operating Agreement should describe what happens next if any of these events should occur:
- A member decides to retire or resign
- A member declares personal bankruptcy
- A member gets divorced, and their ex-spouse receives an ownership interest in the company
- A member dies, becomes disabled, or becomes incapacitated
A buyout agreement could be another separate document in addition to your Operating Agreement or just a few clauses in the agreement. Either way, you would want to give clear instructions about the following:
- Do you want to restrict membership and only allow members to buy a departing member’s percentage of the company?
- If members are allowed to sell their portion of the company to third parties, will other members have the first chance to buy it?
- How will the price of a member’s interest be calculated and paid, if and when they leave the business?
- What is the vetting process for a new member’s acceptance in the company?
- Who can vote to approve a new member’s acceptance?
If you are a multi-member, manager-managed LLC with specific and detailed buyout provisions, you may create a separate buyout agreement among the members. As always, consult a business lawyer familiar with your state and industry to ensure all relevant points are covered.
10. Holding Meetings
Even if you are going to be a member-managed LLC, and members will work together from one location, the day-to-day activities of your business might not be conducive to discuss important decisions.
That’s why it’s recommended that you also include rules regarding meetings in your Operating Agreement. If it’s in writing, it becomes easier to enforce and follow. You may add the reasons for the meetings, their regularity, and where they would be held.
The Article of Organization form has a space for the date of dissolution because some companies are formed for specific purposes. After completion of the project, the company is dissolved. Even if you are not one of those companies, and you want your LLC to exist perpetually, you still need to add provisions for dissolution in your Operating Agreement.
The purpose of your Operating Agreement is to prepare resolutions for future disputes or problems. A clear course of action for the dissolution of the company will make it less complicated and expensive.
To help you narrow down what you need to include in this section, answer the following questions.
- What events can cause a dissolution?
- Who can initiate the dissolution of the company?
- Who can vote to approve the closing of the business?
- Does a majority vote approve the dissolution, or does it have to be a unanimous decision?
- How are the remaining assets (after paying all debts and obligations) of the LLC to be divided among the members?
Here is a step-by-step guide to close an existing Nevada LLC:
- Pay off all outstanding taxes, interests, or penalties if there are any. Ensure all tax returns for the business are filed for all the years the company has been doing business.
- File a Certificate of Dissolution/Cancellation for a fee of $100 with the Secretary of State.
- Give notice to all creditors, vendors, suppliers, clients, and employees of your intention to go out of business.
- Close all business bank accounts and credit cards.
- Cancel licenses, permits, and fictitious business names issued to the company.
- Publish a statement in a local newspaper in the county, city, or municipality where your business is located that the LLC is no longer in business.
Even though you don’t want to think about closing the business that you are still in the process of building, you will thank yourself later because you chose to draft a comprehensive Operating Agreement.
12. Single-Member LLCs
An Operating Agreement can have multiple benefits for a single-member LLC. So, even if you are the sole owner of your Nevada LLC, it’s still best practice to draft one.
Banks and investors favor companies that have Operating Agreements drawn up. And if ever you have to go to court over a lawsuit, the Operating Agreement will be another line of defense to help prove that you’re running your business as a separate entity. That helps save you from being personally liable for the obligations of your company.
13. Severability Clause
Close your Nevada LLC Operating Agreement with a severability clause. This is a standard legal boilerplate used in contracts. It is used to affirm that even if a section of the Operating Agreement becomes unenforceable under the state or federal law, it should not invalidate the rest of the agreement.
Get Professional Guidance to Help With Your Operating Agreement
ZenBusiness has made the process of drafting an Operating Agreement for your business simpler. Get your template here and get started. Our template allows you to have control over how you write your Operating Agreement while still following a standard format.
However, as businesses have different needs and structure, it’s still recommended that you consult a legal professional before signing your Operating Agreement.
Updating and Revising Your Nevada LLC Operating Agreement
The operations of your LLC will constantly change to accommodate the needs of you, your industry, and your customers. Your Operating Agreement should, too.
Since it is the main document guiding the day-to-day activities of the business and the ebb and flow of its management and members, you should update it every time a major business decision is made.
These major events may include:
- You welcomed a new member.
- A member left the company.
- Members made additional capital contributions.
- You changed the schedule of profit payout from quarterly to monthly.
- You changed the management model from member-managed to manager-managed.
However, even if you didn’t make any changes to the business structure or operations, it is still advisable to review the Operating Agreement yearly. This ensures that the provisions you have are still relevant to your needs and goals for the company.
More importantly, to be compliant and maintain your company’s good standing, you need to file a Certificate of Amendment every time you make any changes to the following:
- The name of the company
- Your Nevada registered agent
- The purpose of your business
- The tax classification of your business
- The management structure of your LLC
- Any addition to the Articles of Organization
- Any changes on information previously provided in the Articles of Organization
In Nevada, the cost of filing a Certificate of Amendment with the Secretary of State is $175. You can do all your filing through Nevada’s business portal, SilverFlume.
- Is an LLC Operating Agreement required in Nevada?
No, an Operating Agreement is not legally required for your Nevada LLC, but it is strongly recommended that you create one for your business anyway.
- Where do I get an LLC Operating Agreement in Nevada?
ZenBusiness has an existing template. Use the template to outline the rules and plans you want for your business.
But as every business has different structures and needs, it’s recommended that you consult a professional to ensure you create a customized Operating Agreement for your company.
- Does a single-member LLC need an Operating Agreement in Nevada?
You can still take advantage of the benefits of a Nevada Operating Agreement if you are the sole member of your LLC.
- Do I file an LLC Operating Agreement with Nevada?
No, you don’t need to file your Operating Agreement with the Secretary of State. But you need to keep it as part of your company records and give copies to your members.
- Can I write my own LLC Operating Agreement in Nevada?
Yes, you can, but it is strongly recommended that you consult with a professional to ensure that you cover all relevant points specific to your business structure.
- Do I need a lawyer for an LLC Operating Agreement in Nevada?
No, but you are encouraged to consult with a legal professional who is well-versed in Nevada business laws to ensure that your Operating Agreement covers important points to suit your company.