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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.
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.
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:
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:
The first section of your Operating Agreement will contain basic information about your company, which includes:
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.
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:
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:
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.
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:
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.
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:
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.
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:
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:
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 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:
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.
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.
Here is a step-by-step guide to close an existing Nevada LLC:
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.
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.
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.
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.
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:
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:
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.
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.
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.
You can still take advantage of the benefits of a Nevada Operating Agreement if you are the sole member of your LLC.
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.
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.
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.
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