The idea of owning and running a business is exciting for most people. But as a business owner well into forming your own limited liability company (LLC), you also know that planning and decision-making is part of being an entrepreneur.
The Operating Agreement will establish the organizational structure of your North Dakota LLC and provide an outline of its day-to-day operations. This valuable document will protect the plans for your company because it will offer clarity and a course of action for major business decisions. Create one for peace of mind and to take advantage of its practical benefits.
If you are excited to start, below are details for a comprehensive North Dakota Operating Agreement. Find out why you need it, what to include, and how to draft one.
What is a North Dakota LLC Operating Agreement?
You are not required by North Dakota law to draw up an Operating Agreement for your LLC. But seeing that you’ve spent considerable time and capital on your business, you should take advantage of this opportunity to secure your investment. Create a contract between you and the other members of the LLC.
This document will describe the LLC owners’ roles and detail how the business should be run and managed. It will also set forth instructions for business matters that may need a resolution, such as closing up the business.
The Operating Agreement is not filed with the office of the Secretary of State during the LLC formation process. But once all the members of your LLC sign it, it becomes a legal document. It should be kept with your official company records.
Why do I need an LLC Operating Agreement in North Dakota?
The U.S. Small Business Administration (SBA) advises LLC owners to create an Operating Agreement, not only because it’s considered best practice if you have a business but because it gives your company legitimacy. It signals professionalism and credibility.
The benefits of having a North Dakota LLC Operating Agreement also include:
- Further protect the LLC in terms of liability: Create an Operating Agreement to take full advantage of your LLC’s business structure. This further distinguishes yourself from your company and can protect you from personal liability if the business gets sued.
- Formalize verbal agreements: Running a business is a huge endeavor, and, as such, disagreements can arise. So, even if you are starting an LLC with people you know and trust, you should have a binding contract among yourselves. Setting guidelines and a clear description of each member’s roles and responsibilities will help prevent disputes.
- Protect your agreement in the state of North Dakota: If you don’t have a written Operating Agreement, according to the North Dakota Uniform Limited Liability Company Act, your LLC will default to state laws that will apply to your company. But they may be different from what you and other members of the LLC have agreed on. Draft an Operating Agreement to take full control of your LLC’s rules and regulations.
What do I include in my North Dakota LLC Operating Agreement?
Your management style and the goals you have for your North Dakota business are unique to you. Luckily, you can customize your Operating Agreement to reflect that. You can design your Operating Agreement to address points that are essential and relevant to you.
Below are resources and recommendations to help you create a comprehensive Operating Agreement.
Items to include in your North Dakota Operating Agreement:
- Company Formation
- Management Structure
- Duties of Members and Managers
- Voting Rights and Responsibilities
- Capital Contributions
- Distribution of Profits
- Succession Planning
- Buyout or Buy-Sell Rules
- Severability Provision
1. Company Formation
The Operating Agreement will open with basic information about your company similar to what you provided in the Articles of Organization that you filed with the North Dakota Secretary of State.
This may include:
- Legal LLC name
- LLC’s organizational date
- North Dakota registered agent
- Purpose of the business
- Names of the members
- Tax classification
Your North Dakota Operating Agreement must include the allocation of each member’s ownership in the company. If you are the sole owner of the company, you own 100% of the business.
But for an LLC with two or more members, membership interest needs further discussion. You may choose to divide the company equally among yourselves, without consideration of your initial capital contribution. This means that if you have four members, you will each have a 25% stake in the business.
You could also decide to award ownership according to capital contributions. For example, an LLC has three members, and the company needs an initial capital of $15,000. You contribute $7,500, while the other two members contribute $3,750 each. It means you own half of the company, and they will each own 25%.
3. Management Structure
One of the features of the LLC business structure is the flexibility to manage it yourself. You also can appoint managers to run the business if you are not keen to do it.
A member-managed model is generally preferred by LLCs with only a few members, who prefer to work on the business themselves. On the other hand, a manager-managed LLC works best for companies with relatively large numbers of members, where it’s not practical to ask all members to be involved in the everyday operations of the business.
Your Operating Agreement should specify the management structure you chose for your company and include the conditions you may have about changing it.
4. Duties of Members and Managers
This section of your Operating Agreement will describe how business decisions are made, who can make them, and how they’re enforced. You should establish members’ roles in the company and add a description of the manager’s responsibilities and their scope of authority.
This is important from a legal standpoint because clearly defined roles will protect everyone if one person acts in bad faith.
5. Voting Rights and Responsibilities
For this portion of your Operating Agreement, you’ll establish the voting power for each member of your LLC. Some companies award each member one vote regardless of their capital contribution or role in the company. Meanwhile, other LLCs choose to allocate voting powers in proportion to each member’s ownership stake or by some other metric.
For example, let’s say you have four members, and one member contributed 40% capital, and everyone else holds a 20% ownership percentage. That same percentage translates to their voting powers. This means one member is allowed two votes, and the rest will have one each.
Specify how you’ll vote and count each member’s vote in your Operating Agreement. Also, mention if a majority vote is enough to resolve an issue or if you want a unanimous vote among the members at all times.
6. Capital Contributions
Partners and members in an LLC will usually invest by contributing cash, properties, and goods for the use of the business. In return, they will have a stake in the company. In this section of your North Dakota Operating Agreement, you’ll specify each member’s contribution to your business and the corresponding percentage of ownership.
7. Distribution of Profits
Your Operating Agreement should detail how profits are distributed among the members. You can choose to distribute business profits equally or keep the same percentage of each member’s ownership interest or use some other determination. It’s all part of the discussion you need to have with your co-owners.
You’ll need to provide guidelines on the following, as well:
- Will your business adopt the calendar year or fiscal year?
- Are owners allowed to draw from the business funds at will?
- What percentage of the yearly profits will be rolled over as capital?
Whether you are the sole owner of an LLC or a multi-member LLC, you might need to consult with an accountant to discuss your financial situation to figure out what profit allocation will work for you.
The tax classification of an LLC is one of its advantages. A single-member LLC is categorized as a sole proprietorship by the IRS. And if you have two or more members in your LLC, your company is classified as a partnership.
But you may elect to change your tax classification to a C corporation or an S corporation if you are eligible. A small LLC may not gain many benefits from choosing to be taxed as a C corporation. That’s why many companies will choose to elect the S corporation status if they’re eligible.
Sole proprietorships and partnerships are pass-through entities, which means owners can claim profits and losses, credits, and business deductions on their personal tax returns. The business itself is not taxed on its income.
The tax classification of your LLC will affect the members of your LLC significantly. So, it’s important to discuss this matter among yourselves and maybe an accountant before you decide. Whatever you determine needs to be expressly written in the Operating Agreement.
9. Succession Planning
To create transparency and allow for a smooth transition in the case of a member leaving the company, include guidelines for the following in your North Dakota LLC Operating Agreement:
- If a member’s departure or death would mean dissolution for the company
- If members can sell or transfer their ownership to third parties (such as a spouse, relative, legal representative, or company)
- If existing members have the right of refusal before the sale is offered to external buyers
- How is the price of the membership calculated if selling or transferring membership to another member
10. Buyout and Buy-Sell Rules
A buyout agreement can be a few clauses in your Operating Agreement. But if you need to add more detailed guidelines, you can make a separate document. As always, it’s advisable to consult a business lawyer familiar with state laws to ensure that points relevant to your business are covered.
Basically, you need a buyout agreement to protect your company when members decide to leave and sell or transfer their membership to external buyers. On this agreement, you can prohibit the sale of membership to third parties. Or you can add a vetting process that third parties wanting to join the company would have to pass.
In this document, you can also restrict the rights of a transferee. You can state that they’re only allowed to receive profit shares but won’t participate in the business. A transferee inherits a member’s stake in the business, such as a member’s spouse, relative, or legal representative.
As a North Dakota LLC, you won’t be required to conduct annual meetings and keep detailed records. But you might still want to meet with members of your company to discuss business matters.
For this reason, it might be easier for all parties to add a clause in the Operating Agreement regarding company meetings. You may add provisions for what events will require a meeting of all the members, how meetings are scheduled, and where they’re held.
You are creating an Operating Agreement to be prepared for all eventualities, including closing your business. Provide multiple procedures, such as ensuring all of the company’s obligations are paid and that all business bank accounts, credit cards, and state licenses are canceled. An improperly dissolved business may cause problems and personal obligations down the road.
Address the following in your North Dakota Operating Agreement:
- Who has the right to initiate a dissolution?
- Who can vote to approve the closing of the business?
- What events could cause the dissolution of the company?
- Is a majority vote enough to close the business, or does it have to be a unanimous decision?
- How will the remaining assets (after paying all debts and obligations) of the LLC be allocated?
13. Severability Clause
You should end your North Dakota Operating Agreement with a standard severability clause. It’s a legal boilerplate used in contracts. It states that even if a portion of the Operating Agreement becomes unenforceable under the law, it should not invalidate the rest of the agreement.
Partner With ZenBusiness for Professional Assistance
Are you eager to start running and growing your business, but don’t have time to worry about your Operating Agreement? ZenBusiness has a template that can guide the creation of your own Operating Agreement.
However, as businesses have different needs and organizational structures, it’s highly recommended that you consult a legal professional before signing your Operating Agreement.
Updating and Revising Your North Dakota LLC Operating Agreement
You’re advised to update your North Dakota Operating Agreement whenever there are changes in the managerial structure of your business, such as when you’ve appointed a manager to run your company, and it’s no longer classified as member-managed.
It’s also recommended to revise the agreement to reflect major business decisions, such as if you expanded and added a new member, additional contributions were made to the business capital, or you elected to be taxed a different way.
Even when you didn’t have any major business event, it is still advisable to revisit your Operating Agreement yearly. This is to verify that the guidelines you’ve written down are still relevant to the company’s needs and goals. Schedule the revision during the time your annual reports are due or when you’re updating your registered agent service and/or registered office.
The state of North Dakota requires LLCs to submit an annual report to the Secretary of State. This document and the corresponding fee of $50 needs to be filed on or before Nov. 15 of each year.
In addition, to remain compliant and maintain your LLC’s good standing, you need to file an amendment whenever you make any changes to the following:
- Name of the company
- The purpose of your business
- Any kind of change related to your registered agent’s information
- Changes to the tax classification of your business
- Changes to the management structure of your company
- Any kind of change to the information previously provided in the Articles of Organization
The best way to ensure your business’s compliance and good standing is to partner with ZenBusiness. Let us handle the administrative work of keeping your business compliant so that you can focus on growing your business.
North Dakota Operating Agreement FAQs
- Is an LLC Operating Agreement required in North Dakota?
No. Your business is not legally required to have an Operating Agreement in the state of North Dakota, but you are encouraged to create one.
- Where do I get an LLC Operating Agreement in North Dakota?
ZenBusiness has a template to guide you in writing your Operating Agreement. The template gives you a standard format and prompts to ensure you don’t forget anything. However, you should still consult with a professional to ensure that you cover all the points relevant to your company’s needs.
- Does a single-member LLC need an Operating Agreement in North Dakota?
Yes, an LLC owned by only one person can still benefit from an Operating Agreement because it proves that the business and the owner are separate entities.
- Do I file an LLC Operating Agreement with North Dakota?
No. You don’t need to file your Operating Agreement with the Secretary of State in North Dakota. However, you should keep it with your company records and give copies to your members.
- Can I write my own LLC Operating Agreement in North Dakota?
Yes, but why not take advantage of an Operating Agreement template? They provide the relevant essential points and use requisite legal terminology.
You’re encouraged to consult a legal professional to review the document before you make it official.
- Do I need a lawyer for an LLC Operating Agreement in North Dakota?
It is not mandatory to have a lawyer draft your Operating Agreement in North Dakota. Still, you are always encouraged to have a legal professional well-versed in your state’s laws check for inconsistencies.
A lawyer may also pinpoint specific issues relevant to your business, not included in existing templates. They can also help include provisions to protect members from being personally liable.