What Is An LLC Operating Agreement?
LLC, which stands for “Limited Liability Company,” is the most popular business structure among SMBs at the moment. LLCs are easier to form than corporations, but provide more protections compared to sole proprietorships and general partnerships. An LLC also allows its owners, called “members,” to choose how the company will be taxed, as well as how it will be run or managed.
An LLC costs less to form, is easier to maintain, pays less taxes compared to incorporated businesses, and protects the owner’s personal assets from court losses. These, and the above benefits, make LLCs the most attractive option for startups and existing companies looking to form another business.
For an LLC to function well, however, it has to have its own Operating Agreement—a key document that, while not necessary to form the business entity, is crucial for its longevity and growth.
An Operating Agreement is an internal document that contains instructions on how the LLC is designed to run. It contains details about the company, its members, the roles and responsibilities that each member has, how profits and losses are distributed, how members earn profits, and so on.
An Operating Agreement is largely similar to Articles of Incorporation in that it describes how members govern their LLC. It allows you to customize the financial and working relationships between the members of your LLC, in a way that suits your business.
Does Nevada require all LLCs to have an Operating Agreement?
The state of Nevada does not require LLCs to create and submit an Operating Agreement. This means LLCs can operate legally without having created an Operating Agreement before and during operations. Having one, however, helps clarify many things in your company—everyone’s roles and responsibilities, and how everyone participates in the company’s decision-making—so that it runs smoothly.
Operating Agreements become binding once all of the members agree to its provisions and affix their signatures. They help keep everyone in line and prevent managerial misunderstandings. Operating Agreements also help protect your business’s limited liability status.
What Are The Advantages Of An Operating Agreement In Nevada?
Your Nevada LLC will benefit from an Operating Agreement in a few ways, namely:
It helps ensure your company’s limited liability status
Operating Agreements can act as formal agreements separating your LLC from you and other members. This makes your business look more like an incorporated entity, helping to ensure that courts will honor your company’s limited liability status. This benefits single-member LLCs the most.
It simplifies your company’s daily operations
An Operating Agreement acts as an instruction manual containing details on how your company does things. It defines the roles and responsibilities every member has. It also contains instructions on how you can solve potential issues or problems that may arise as your company functions. Operating Agreements simplify tasks and prevent any possible misunderstanding that may occur within your company, including those related to finances such as profit and loss distribution.
It keeps your LLC’s members accountable
Operating Agreements become binding documents once your LLC’s members sign them. Everyone is required to follow the terms and conditions indicated in the pages of your Operating Agreement. This helps keep everyone accountable, ensuring that all of the members adhere to what was agreed upon at the start of your LLC. Because of this, your Operating Agreement becomes even more useful as your business grows bigger.
It gives you more control over your business
Operating Agreements allow you to govern your LLC according to your plans. Without them, your company will be subjected to Nevada’s regulations. While the state’s rules won’t be bad for your business, it’s always better to operate your company in a way that suits your preferences. An Operating Agreement ensures you can do just that.
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What Are The Limitations Of An Operating Agreement In Nevada?
Operating Agreements are very helpful to Nevada LLCs in many ways, but they are in no way a complete solution to every issue or problem that may arise in the course of business. They have certain limitations that you must be wary of so you can maximize their use. Below are some of them.
It can only keep state rules at bay
While Operating Agreements allow you to govern your business the way you want, your company is still subject to the laws and rules already in place. They do not replace the state’s laws. You just gain better, more personalized control of your business.
It cannot prevent lawsuits from being filed against your LLC
An Operating Agreement helps reinforce your LLC’s limited liability status. This doesn’t mean no one can file lawsuits against your company, however. Your company still has to apply best practices when it comes to doing business and avoid doing things that could be used as a reason for customers to sue you. For example, you must avoid breaching contracts, or make sure not to cause injuries due to negligence.
Poorly made Operating Agreements cannot completely stop members from violating rules
While an Operating Agreement helps keep members accountable for their actions in the company, it cannot completely stop them from violating rules if it is not thorough and precise in its wording. Members can find loopholes in poorly made Operating Agreements and take advantage of them. While you can create one for your LLC, getting some help from an experienced lawyer ensures a comprehensive Operating Agreement covering all the bases.
What Should You Include In A Nevada LLC Operating Agreement?
Operating Agreements are often difficult to create because of the sheer amount of detail you need to put in them. They must cover all the bases—from the minute details of running your business to the huge company decisions you have to make with the other members of your LLC.
Include important information about your company
To create a good Operating Agreement, you will need to consider many details including the industry your company belongs to, the size of your business, what you plan to offer your clients, and how you actually want to run your venture.
That said, your Operating Agreement must include at least the following details:
- Information about your LLC as submitted to the Secretary of State
- Your LLC’s purposes
- Details about your LLC’s membership, including names, addresses, and positions or titles
- Ownership percentage figures
- Your LLC’s Management Structure
Provide clear details about how your company should operate
Next, include thorough explanations about how your company should function. This means talking about everyone’s roles and responsibilities and discussing how internal processes are done in your company. These should be included in your Operating Agreement:
- Details about the roles and responsibilities of each member
- Details regarding handling Profits and Losses
- Guidelines for your LLC’s Meetings and Voting Procedures
- Instructions on Record Keeping and Financial Reporting
- Instructions on Resolving Disputes
Don’t forget to talk about your LLC’s growth and eventual closure
LLCs are bound to shut down when they finally achieve the purpose for their formation. Before that happens, however, you should expect to see your company grow. This means you must include instructions on how to update your Operating Agreement so that it grows with your company. And lastly, include instructions on what to do when it’s time for your company to get dissolved. Make sure to cover the following when you create the document:
- Instructions regarding Amendments and Modifications
- Instructions regarding Dissolution and Winding Up
We’ll discuss these in detail below. Keep in mind that no two Operating Agreements will be completely similar to each other. This is because they have to be customized to meet your LLC’s unique needs.
How To Form An Operating Agreement
Operating Agreements are not that easy to form. But you can personally create one for your company using the details indicated below. You may also ask lawyers to help you.
Information about your LLC
Your Operating Agreement should easily identify your LLC. It must contain details similar to the ones you provided the Nevada Secretary of State when forming your company. These details include
- Your LLC’s official name
- Your LLC’s official address
- Details about your Registered Agent
Your LLC’s Purpose
Next, you must state your LLC’s purposes for existing, as well as what you intend to do after your business achieves those purposes. This includes specifying your LLC’s expected lifespan or duration. Your new LLC will be dissolved by default after it achieves the results of its formation. An Operating Agreement can help prevent that from happening, or simply provide details finalizing its dissolution.
Your LLC’s Membership
Your Operating Agreement must provide details about your LLC’s members. This includes information about their identity, their initial contributions and ownership percentages, as well as how you plan to deal with transfer of membership. Specifically, you must provide the following:
- The names and addresses of your LLC’s initial members
- Your individual members’ ownership percentages
- Your individual members’ capital contributions
- Instructions to follow when adding new members
- Instructions regarding the transfer of membership interests.
- Instructions regarding membership withdrawal. You must include details about the consequences of withdrawing membership from your LLC.
Your LLC’s Management Structure
Your Operating Agreement must specify your LLC’s chosen management structure. This is crucial to how your LLC will operate, and is also important to determine the level of involvement the members will have in your company. There are two structures to choose from:
- Member-managed LLCs operate under the direct supervision and management of members. In this kind of setup, the members are actively involved in the day-to-day operations of the LLC.
- Manager-managed LLCs, on the other hand, are managed by a manager appointed to the position. In this setup, members are passive and do not play an active role in daily operations.
Details about the roles and responsibilities of each member
Aside from identifying your LLC’s management structure, your Operating Agreement must also include details about the roles and responsibilities that each member of your company has. This is to properly delineate tasks and define the roles everyone plays
Instructions regarding the distribution of Profits and Losses
Next, your Operating Agreement must provide clear instructions on handling the LLC’s finances, particularly its profits and losses. These have to be included:
- The process of distributing profits to the members, including how and when they are distributed, should be explained in detail.
- Instructions on how to allocate profits and losses to each member.
Guidelines for your LLC’s Meetings and Voting Procedures
Your company will conduct meetings from time to time so you can discuss operations, profits, and so on. Your Operating Agreement must include guidelines on how you conduct these meetings, and also when making decisions as a company. Specifically, it must provide details regarding:
- How to organize, schedule, and conduct meetings
- Notice Requirements—How to inform all members about upcoming meetings
- Member’s and manager’s right to vote and contribute to making decisions for the company
- Voting mechanics and vote-counting processes
Instructions for Record Keeping and Financial Reporting
Your LLC needs to be transparent when it comes to its finances. For this reason, your Operating Agreement must provide instructions to ensure accurate recording and reliable reporting of your financial transactions. These should include details regarding the accounting of transactions as well as the auditing or financial records.
- Accounting and Record keeping. Details about your company’s accounting system, which is used to keep track of financial transactions, revenues, expenses, and tax obligations, should be included in the Operating Agreement.
- Specify your company’s fiscal year. This could be a calendar year or any 12-month period beginning at any time during the year.
- Tax Treatment and Filing Requirements. You must specify how your LLC has elected to be taxed. You must also indicate any required filings with Nevada.
Limitation of Liability and Indemnification
In order for your LLC to protect your personal assets, as well as that of the other members, your Operating Agreement must contain provisions regarding indemnification and limitation of liability. Here’s what you should include in the document:
- Provisions for Indemnification: Details regarding the indemnification, or reimbursement, of members who act on behalf of your LLC.
- Provisions limiting your members’ and managers’ liability for the LLC’s obligations.
- Details regarding Insurance Requirements. Your LLC should consider getting insured for better protection. Although your limited liability status can protect personal assets, having additional insurance means increased coverage for some cases. Details about insurance requirements should be included in your Operating Agreement.
Instructions regarding Dissolution and Winding Up
Your LLC was formed with a purpose, and will dissolve once it achieves the reason for its formation. It can also be dissolved for some reasons, such as the untimely departure of a member, or a court order following a lawsuit. The Operating Agreement must include clear and concise details on how your LLC can be potentially dissolved, and how it should handle dissolution regardless of the reason.
Your LLC’s Operating Agreement should also provide details regarding winding up, or the process of settling important matters prior to the closure of your company. These details should include instructions on how your company can liquidate assets, settle debts, and prepare and file tax returns with the IRS. Provisions regarding the distribution of your LLC’s remaining assets post-dissolution should also be included. These assets are typically distributed according to your members’ ownership interests, but having details written down in paper avoids potential disputes about the matter.
Instructions on Resolving Disputes
Disputes tend to happen in any company. To help your membership deal with this, you must embed instructions on conflict or dispute resolution in your Operating Agreement. A thorough, well-crafted Operating Agreement helps you foresee potential issues and provides instructions on how you can deal with them in a way that benefits the company. Do not forget to include this when you create your document.
Instructions regarding Amendments and Modifications
As your business grows you might find a need to update certain rules and regulations so they can better serve your company. For this, you must add provisions allowing you to make amendments and modify your Operating Agreement.
Amendments and modifications to your Operating Agreement have to be done with the approval of the entire membership. You first review your existing provisions, discuss what changes need to be made, and decide whether to apply these amendments during a meeting scheduled for the matter. Members have to vote to approve of the changes before they can be applied.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
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How Much Is A Nevada LLC Operating Agreement?
Nevada does not require LLCs to have an Operating Agreement. This means you do not have to spend anything on it since you won’t need it to form an LLC. Having one in place, however, means adding more credibility to your limited liability status, and preventing potential disputes that could arise in the future while you do business.
That said, an Operating Agreement will not cost you anything if you create it yourself. But if you need some help from lawyers, expect to spend quite an amount to craft a thorough, loophole-free Operating Agreement for your company.
Single-member LLCs in Nevada can expect to pay specialists or legal firms around $500 for their help in crafting a customized Operating Agreement. Multi-member LLCs, on the other hand, should prepare to spend as much as $2,500 for one.
Frequently asked questions
Nevada does not require single-member and multiple-member LLCs to have Operating Agreements, but having one helps your company establish its limited liability status, among other things. Single-member LLCs benefit much from having Operating Agreements, as it helps the company look more like an incorporated entity than a sole proprietorship.
No. Your LLC’s Operating Agreement is an internal document that doesn’t need to be submitted to the State of Nevada. You will use it for your daily operations, among other things.
No. Operating Agreements do not expire and will last until your LLC dissolves. This means you only need to create one for your company. It will be valid and useful until your company achieves its purposes and closes in the future.
Yes. You need to include a provision on making amendments or modifications to your LLC’s Operating Agreement to allow this, however. The changes you want need to be discussed with your co-members if you run a multi-member LLC, and you must get their approval to apply them.
The Articles of Incorporation you submitted to the Nevada Secretary of State is necessary to form your LLC. It contains basic information about your LLC, including its name, address, and the identity of its members. Your Operating Agreement, on the other hand, is an internal document containing detailed and thorough information on your LLC and how it functions. You do not need to submit this to the state, but you still need this for your company’s needs.