Deciding to start a New Jersey limited liability company (LLC) is exciting and can also be scary. Even with the helpful starter kits provided by New Jersey government agencies, the paperwork associated with key elements, such as registered agents and licensure requirements, can make any entrepreneur’s head spin. Within all of that hubbub, you might not have even considered creating a New Jersey LLC Operating Agreement. However, this vital step cannot be overlooked.
Your New Jersey Operating Agreement will dive into crucial details about your new company’s managerial habits, voting procedures, ownership percentages, and many other factors important to your LLC’s success. This document is also where every member (owner) of your LLC should learn about their expectations and responsibilities.
No matter how large or small an enterprise you are planning to launch, your New Jersey LLC Operating Agreement functions as its legal protector, internal template, and financial rulebook. This guide will walk you through each step of drafting your New Jersey Operating Agreement and offer helpful tips on what to include in this foundational document.
What is a New Jersey LLC Operating Agreement?
To register an LLC in the state of New Jersey, you will need to gather a significant amount of detail concerning your business upfront. Your New Jersey LLC Operating Agreement should be drafted at the time of your filing a Certificate of Formation (also referred to as Articles of Organization in other states), which is the document that legitimizes your new company in the eyes of New Jersey state law. Most of this process can be completed online, and the filing fee for your Certificate of Formation will be $125.
Your New Jersey LLC Operating Agreement should not be confused with your Certificate of Formation, although they do go together as foundational pieces of documentation in the launching of your new company. While the law surrounding the formation of LLCs in New Jersey does not currently mandate that an Operating Agreement be in place for a business to form, creating an LLC without one is unadvisable.
Your New Jersey Operating Agreement outlines affairs of the company such as membership interest within your company. It lists all members by name and provides explicit duties for each. This document should handle procedural items, such as how and when voting will take place, the nature of profit distribution, and how any future mergers will be approached. A well-written New Jersey LLC Operating Agreement even includes a plan of action if your business dissolves.
Why do I need an LLC Operating Agreement in New Jersey?
You might wonder why a New Jersey Operating Agreement is so important if it is not included in the official filing requirements set forth by New Jersey law. On this point, it is wise to reference the U.S. Small Business Administration (SBA). The SBA lists the Operating Agreement as a “key document” in the creation of an LLC.
Your New Jersey LLC Operating Agreement works to protect and fortify your business in several ways. The first way is as a kind of playbook for internal procedures. Another way is as the legally enforceable contract between your business entity and all participating members. Once you have written your Operating Agreement to reflect the true goals and nature of your company, it guides all future acquisitions of funding and membership that your business will enjoy.
A New Jersey LLC Operating Agreement helps to protect your business from mismanagement. It works in many ways as the constitution of your company, providing sovereign core principles that all signees are required to work by. The more clarity and detail that you can provide in this document, the less your company’s chances of certain managerial or legal hardships in the future.
Your New Jersey Operating Agreement comes with highly practical advantages, as well. A few of the more powerful ones include:
- Additional protection from personal liability: Many founders choose the LLC structure over other business structures for the protections from personal liability fundamental to the LLC design. Your New Jersey LLC Operating Agreement will serve to enhance and extend the protections already in place via the LLC structure. Even a single-member LLC should have an Operating Agreement because this document provides further distinguishment between the founder as an individual and the LLC as an entity. Although no entrepreneur is keen to imagine future lawsuits, the reality is that such an occurrence is common in the life span of a business, and you want your New Jersey Operating Agreement to be written in such a way as to foresee that.
- Business credibility: All business owners must take careful consideration of the way that their companies are viewed. A New Jersey LLC Operating Agreement lends your company a degree of standing that it would not have otherwise. For example, when investors and financial institutions evaluate you as a potential collaborator, they will want to see a document outlining your company’s values before offering to set up a bank account. Likewise, any third-party mergers or big-name clients will often do the same. Creating a detailed New Jersey Operating Agreement helps legitimize your business in the eyes of everyone involved.
- Maximize LLC flexibility: The built-in flexibility of the LLC structure should be used to its full advantage. A New Jersey LLC Operating Agreement written with that in mind can offer unique freedoms to your business. You can dictate specific aspects of the way your company will handle managerial structures, buyout opportunities, fiscal responsibilities, and other administrative duties. As long as you comply with state law, you can include any details or rules in your Operating Agreement that you see fit, allowing for an enormous amount of supervision over your company that would not otherwise be available.
- Sanctity in the eyes of state law: One of the most effective ways to assess the value of a New Jersey LLC Operating Agreement is to look at what can become of your business if you do not write one. Ultimately, wherever you fail to write a rule or guideline, default New Jersey law will step in. This can mean everything from the state government having a hand in the sale of ownership percentages to voting rights inside your LLC. As New Jersey law recognizes an Operating Agreement as valid, you protect yourself from state interference by writing one geared toward your business’s aims.
What do I include in my New Jersey LLC Operating Agreement?
One of the most valuable features of your New Jersey LLC Operating Agreement will be its individuality. Your document will be different from any other Operating Agreement in the state. A good place to start when referencing what to include in your Operating Agreement are the statutes specific to Operating Agreements under the New Jersey Revised Uniform Limited Liability Company Act.
The following items represent some of those basic features that appear in any thorough New Jersey Operating Agreement:
- LLC Name
- Managerial Structure
- Member Duties and Responsibilities
- Voting Rights
- Meeting Guidelines
- Buyout and Buy-Sell Rules
- Succession Planning
- Single-Member LLC Statute
- Severability Provision
1. LLC Name
Although writing the correct name in your New Jersey LLC Operating Agreement may seem like an obvious step that does not require much thought, even something this basic is highly specific. Make sure that the LLC name you include in your Operating Agreement is the same one that appears on your filed New Jersey Certificate of Formation.
If you are drafting your New Jersey LLC Operating Agreement at the same time that you are preparing your other business formation documents, make sure you have thoroughly reviewed the New Jersey LLC naming guidelines and conducted the requisite business name search.
All persons having an ownership claim in your New Jersey LLC must have their full names appear in your Operating Agreement. There should be a section dedicated to listing members. Depending on how you choose to divide ownership between your LLC’s members, each name may reflect a different ownership percentage or ownership interest.
Your New Jersey Operating Agreement may specify that a member’s ownership percentage is applied in proportion to their capital investment. Capital refers to the finances required to launch a business. You may likewise decide that you want ownership percentages split evenly among all members, regardless of capital input. Or, you may use some other metric to determine ownership percentages.
Apply details to your New Jersey LLC Operating Agreement that fairly address profit distribution.
“Distributions” is the term for how profits will be divided between your company’s members. Like ownership percentages, you can divide profits in proportion to each member’s ownership percentage, divide them evenly among all members, or determine some other method of dividing them.
This section of your New Jersey LLC Operating Agreement should also specify when profit distribution will take place for your company. Will you disperse profits at the close of each fiscal year or during a set quarter of the business year? Because profit distribution can quickly become a sore spot that leads to arguments among your company’s members, this is one of the most important areas of your New Jersey Operating Agreement to spend time on.
4. Managerial Structure
A well-crafted New Jersey LLC Operating Agreement should provide details about whether your company will be member-managed or manager-managed. These are the two most common management structures for most LLCs.
A member-managed LLC is one in which the owners are responsible for the majority of the daily operations of the business. It is common for owners to have input proportional to their share of ownership. This structure does mean that each member of your company can be involved in any decisions or vote-worthy issues that come up within your New Jersey LLC.
If it would be preferable for a hired manager or one or more designated members to handle the day-to-day operations of your business, a manager-managed structure may be the right choice for you. In this type of structure, a business owner can write in passive investors whose role remains strictly financial. This means that your company can have affiliates who aid your business but do not have the power to impact its direction.
5. Member Duties and Responsibilities
If you choose a manager-managed LLC structure, your New Jersey Operating Agreement should include as much detail as possible about the exact duties of each manager. These duties should extend well beyond the simple daily tasks associated with running the business to judgment calls that will impact the entire company.
For instance, will there be decisions that your managers are authorized to make on their own, or will all decisions require a conference with other managers? Including these details navigates your business away from miscommunication problems that can cost your business time and resources.
Another benefit of a New Jersey Operating Agreement is that it allows for the express outlining of nonmanagerial member duties. Even if you have a great number of members who are not necessarily active in the daily operations of your company, write in their responsibility to attend meetings and other functions at your discretion.
Member influence over and engagement with your LLC can be made highly beneficial when expectations are spelled out in your Operating Agreement. Remember that all managers and members should be expected to sign the Operating Agreement at its completion for it to become a legally binding contract.
6. Voting Rights
Make certain to apportion fair and feasible voting rights in your New Jersey LLC Operating Agreement. Items such as whether voting power will rest with ownership percentage and votes always have to be unanimous are examples of things to include. Considering what decisions require a vote is also smart.
Think carefully in this portion of your New Jersey Operating Agreement about how much power you think is best to align with ownership percentages. It may be that you have members who have contributed quite a lot of money but do not want to actively govern the business. In such cases, it might be prudent to apportion more of that person’s voting rights to someone more involved in daily operations.
By the same token, it may be wise to legislate that all members receive an equal share in the direction of the business. These are choices that are best discussed at length with all business partners and advisers ahead of drafting your Operating Agreement.
7. Meeting Guidelines
One of the most imperative parts of drafting your New Jersey LLC Operating Agreement is the inclusion of obligatory meetings. Scheduled meetings with members and managers represent your company’s most convenient and predictable outlet to address big decisions. You can write details into your Operating Agreement that pertain to how voting will occur and how annual reviews will be handled at these meetings.
Your New Jersey Operating Agreement can make meetings a mandatory aspect of your company’s established rules and set guidelines or yearly calendars for meeting occurrences. If you are running a manager-managed LLC, making meetings mandatory represents a stable method for encouraging less active members to be productive within your company.
8. Buyout and Buy-Sell Rules
Any New Jersey LLC Operating Agreement should be written with the company’s ideal growth and expansion at its core. Insert clear guidelines on what it takes to be a member and how new members should be inducted. These guidelines could include anything from a unanimous or majority vote by other members to an established amount of capital infusion.
In the natural course of your business, you can expect members to leave your LLC for various reasons. Your New Jersey Operating Agreement needs to include provisions pertaining to the proper way for a member to exit.
Common questions for your Operating Agreement to address include:
- What occurs with a leaving person’s ownership percentage?
- Do incoming members need to buy in at the same percentage as leaving members did?
- Do ownership percentage transfers go up for a vote?
Consider these kinds of questions thoughtfully as you draft your New Jersey Operating Agreement, as their placement can support or inhibit your company’s long-term growth.
9. Succession Planning
No one wants to dwell on hard subjects, but your New Jersey Operating Agreement needs to address a few. One such is your company’s succession plan. Natural retirements and the passing away of founding members are parts of life. Working them into your Operating Agreement means your company does not face trouble when such events occur.
Your New Jersey LLC Operating Agreement needs to make clear what becomes of ownership percentages at the death or retirement of a member. Are members able to leave these percentages to family or other designated parties? Does the ownership percentage transfer to another member? Can it be purchased back by the company or sold by inheriting members? Draft into the Operating Agreement any rules you think will best benefit the business.
Make sure to include provisions for your own part of the LLC when you complete this section. What should happen to your portion if you are unable to lead? Does your ownership percentage pass to your family or fellow members? These are all considerations that have a direct impact on the longevity of your New Jersey LLC and should be weighed carefully.
It may seem counterintuitive to write in a plan for your company’s demise in a New Jersey LLC Operating Agreement. However, including a dissolution plan is another key consideration that can highly benefit your new business.
Companies grow and dissolve for all sorts of reasons, some within the owners’ control and others not. In the ever-changing business climate, you want to make sure that your company is dissolved fairly and legally should that contingency arise. You may want to write in different rules for dissolution that pertain to the different ways that your business could cease to be.
For example, if your LLC breaks up due to members moving on to their own projects, details about their final operational and financial obligations might be included. If some external factor causes your company to fold, your New Jersey LLC Operating Agreement can specify how members must fulfill outstanding obligations to the company.
An official New Jersey Certificate of Cancellation must be filed if your business dissolves. The associated fee for this service is $100.
Despite its importance and seriousness, your New Jersey LLC Operating Agreement is not immune to change. If you find that amendments are needed, it is always better if you have a method for implementing them.
For this reason, it is wise to add a section on modification procedures in your Operating Agreement. Common modifications might include the addition of new members, changes in voting powers, and even member eligibility when it comes to signing off on amendments. Make educated decisions about how these modifications can most judiciously be made and include all procedural steps necessary.
12. Single-Member LLC Statute
Are you the new founder of a single-member LLC? If so, you may wonder what a New Jersey LLC Operating Agreement means to you. The simple response to that is more than you might imagine.
Part of the reason for that is the singular status itself. As a sole founder, your New Jersey Operating Agreement announces that you are the only decision-maker legally able to speak for your business. A document that specifies you as the exclusive owner and manager of your company also further sets forth your distinction as an individual from your LLC as an entity.
13. Severability Provision
As a conclusion measure, make sure that your New Jersey LLC Operating Agreement includes a severability provision. A severability provision is a clause that prevents a potential mistake in one segment of the Operating Agreement from affecting or nullifying the remainder of the agreement.
For instance, if an error turns up in the section of your New Jersey Operating Agreement that defines voting rights, you do not want that error to mean that everything you included in other sections, such as dissolution, ownership, etc., to become void.
Taking the time to include this important step protects you and your fellow LLC members from a great deal of wasted time. Beyond that, you will not have to worry about the loss of investment income due to a simple oversight rendering your Operating Agreement invalid.
Get Help Creating Your LLC Operating Agreement
Because an Operating Agreement can be complex and an important legal document — used for funding or a reference to settle legal disputes — it’s a good idea to consult a business lawyer familiar with New Jersey laws to ensure that it covers everything it needs to.
You can also turn to ZenBusiness for help, utilizing our Operating Agreement template. It can help you outline the rules and plans that govern your LLC and provide the structure and framework needed to grow your business. Without an Operating Agreement, your LLC will default to the standard rules and guidelines set by New Jersey.
ZenBusiness is a trusted partner for business owners who want a solution to the challenges of starting, running, and growing their companies.
Updating and Revising Your New Jersey LLC Operating Agreement
Your New Jersey LLC Operating Agreement should be written and established as a document that is always subject to changes. Your business will likely grow and expand in ways that you cannot foresee, and it is impossible to anticipate every eventuality in your original Operating Agreement draft.
Save yourself effort later by writing with a great deal of flexibility from the start. Some common shifts that you can expect to occur in the life span of any business might include:
- Changes in voting rights per ownership percentages
- Addition or subtraction of members
- Changing management structure
Make a habit of checking your New Jersey LLC Operating Agreement at least once a calendar year, even when no changes appear immediately. A good rule of thumb is to revisit it when you’re preparing your annual report and updating things like your registered office. Take that opportunity to ensure that the wording and structure of rules still serve the realities of your business.
A few easy steps to the successful revision of your New Jersey Operating Agreement include:
- Read the document for places where goals and procedures may need improvement. As you have likely written in procedures for how changes can be made, implementing a change should just require following the steps you have established in the document.
- Ensure that all changes are voted according to established voting rights procedures and written down. Never let a verbal agreement stand in for written amendments in your New Jersey LLC Operating Agreement.
- Make sure that all members sign off on the new version of your Operating Agreement that contains the changes. Without renewed signatures, the changes will not be legally valid and binding.
Certain changes to your New Jersey LLC Operating Agreement may require you to update your official information with the New Jersey state government.
More New Jersey LLC Operating Agreement FAQs
- Is an LLC Operating Agreement required in New Jersey?
New Jersey LLC registration does not explicitly require the submission of an Operating Agreement, but founding any LLC without one is unadvisable.
- Where do I get an LLC Operating Agreement in New Jersey?
ZenBusiness offers a customizable template for all of your Operating Agreement needs. No matter the size or goals of your LLC, a template can help you with an Operating Agreement that will reflect your company’s values.
- Does a single-member LLC need an Operating Agreement in New Jersey?
Single-member New Jersey LLCs also benefit from having an Operating Agreement. Having an Operating Agreement gives a further degree of separation between yourself as an individual and your LLC as an entity.
- Do I file an LLC Operating Agreement with New Jersey?
No, you are not legally required to present your New Jersey LLC Operating Agreement to the state government. Keep it with your company’s important paperwork.
- Can I write my own LLC Operating Agreement in New Jersey?
Yes, there is no requirement that your New Jersey LLC Operating Agreement must be drafted by an attorney or another outside appointee. However, enlisting the help of trusted professionals like ZenBusiness takes the stress and guesswork out of the equation and helps ensure that your Operating Agreement meets all professional and state requirements.
- Do I need a lawyer for an LLC Operating Agreement in New Jersey?
No, there is no legal requirement stating that you have to hire a lawyer during the drafting of your New Jersey LLC Operating Agreement. However, some entrepreneurs choose to employ a lawyer because they want to draft responses to state-specific laws into their Operating Agreement. Others employ lawyers to help gauge high-risk scenarios and draft clauses pertaining to those scenarios into the Operating Agreement.