What Is An LLC Operating Agreement?
An Operating Agreement is an internal document serving as an owner’s manual. It contains details about the LLC that uses, identifies its members, and specifies their roles and responsibilities in the business. The document also provides guidelines on how the company’s internal processes work.
Does North Dakota require all LLCs to have an Operating Agreement?
The state does not require LLCs to have an Operating Agreement to register. However, according to the North Dakota Uniform Limited Liability Company Act, North Dakota LLCs are encouraged to use such a document to govern their business. It does not need to be submitted to the Secretary of State and should be kept inside the company.
What Are The Advantages Of An Operating Agreement In North Dakota?
An Operating Agreement gives North Dakota LLCs several advantages to doing business. These include, but are not limited to, the following:
Give your more control over your LLC
The state of North Dakota has default rules governing LLCs. You will be able to bypass these, or at least tweak them according to your needs, if you have an Operating Agreement in place. While the default rules won’t put your business at a disadvantage, being able to create customized rules will make it easier for you to run your company.
Streamlines business operations
The guidelines and instructions provided in your Operating Agreement remove all confusion and ensure better productivity. Members won’t have to wonder what they are doing and why. It also helps prevent disputes from arising in your company.
Keeps members in line
An Operating Agreement becomes binding once it is signed. This means members will have to abide by the regulations in the document at all times. Those who intentionally violate the rules in it can be sued by the LLC or its other members.
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What Are The Limitations Of An Operating Agreement In North Dakota?
While an Operating Agreement brings many benefits, it has some limitations as well. These prevent it from doing certain things, such as:
It cannot give you control over everything
An Operating Agreement can only be used to govern the internal processes of an LLC and the relationships between its members. It does not have power over external factors such as changes in North Dakota’s policies or the rise and fall of labor costs in the state.
It cannot be used to counter the state’s laws
An Operating Agreement allows you to customize rules to fit your LLC’s needs. But every provision you include must abide by North Dakota’s existing laws. Using the document to counter the state’s laws would be criminal.
It cannot stop outsiders from filing lawsuits against your business
While an Operating Agreement can help settle issues inside your LLC, it cannot stop outsiders from filing lawsuits against your business if they have valid reasons. You still need to ensure that the products and services you provide are of top quality and that your business is not putting anyone at a disadvantage.
What Should You Include In A North Dakota LLC Operating Agreement?
As an owner’s manual of sorts for your North Dakota LLC, your Operating Agreement must contain enough information and guidelines to cover every aspect of your business.
This means it must be able to identify your LLC and list its purposes, list information about your LLC’s members, provide instructions regarding internal processes, and contain guidelines for handling unforeseen cases.
How To Form An Operating Agreement
Before working on your Operating Agreement, do some research and study the provisions included in the North Dakota Uniform Limited Liability Company Act. These can be used as the basis for what you need to include in your LLC’s document.
Next, plan what provisions you need to put in your Operating Agreement. If you run a multi-member LLC, gather all the members together and brainstorm so you can cover all the potential issues that your business might face in the future. When you’re ready, you can proceed by following our steps below.
Information about your LLC
Start by providing information used to identify your LLC, such as its name and registered address. Include the name and address of your registered agent since they will be interacting with the state of North Dakota on your behalf.
Also, state the purposes for your LLC’s existence in North Dakota. This section will give your business a direction to pursue. Your company’s actions must be geared towards achieving the purposes indicated here. Courts can order the dissolution of your company if it fails to move toward its goals
After that, provide information about your LLC’s members. Indicate the names and addresses of each member, then specify their respective capital contributions and interest percentages. This part serves as the proof of ownership that courts can check if needed. By specifying interest percentages, you also set expectations on what members will receive from the business.
In this section, you need to indicate what kind of management structure your LLC will have. The members of your company can choose whether it will be member-managed or manager-managed, but keep in mind that your choice here directly determines the roles that each member will have.
In member-managed LLCs, for example, the members take an active role in the daily operations and decision-making. Conversely, the members of a manager-managed LLC entrust daily operations to someone appointed for the role.
After indicating what kind of management structure you choose, provide a detailed description of the roles and responsibilities of each member/manager. Doing this clarifies expectations and puts limits on the authority given to everyone. This will also remove confusion regarding the workload given to every member or manager.
Guidelines for meetings and voting
Your Operating Agreement must provide guidelines for scheduling and conducting meetings. The members of your LLC can call for meetings to provide routine updates or schedule emergency meetings for more urgent matters. You must also describe how your voting process works since this is how the members can express their approval or disapproval when necessary.
Profits and losses
Next, you must provide guidelines for the distribution of profits and losses among members. These are typically divided and distributed according to interest percentages, but you can tweak that to meet your company’s needs. Make sure to get everyone’s approval with regard to this matter.
After that, provide a detailed description of your company’s accounting system. This should cover how you monitor cashflow, keep records of financial transactions, and provide reports about your company’s finances. Be as detailed as possible so your accounting system becomes transparent and more reliable in the eyes of potential investors and new members.
Guidelines for solving disputes
Include guidelines for resolving disputes that arise during the course of business. The instructions you provide here must focus on solving the issues without needing intervention unless necessary.
Dissolution and closure
Finally, provide guidelines for closing your LLC properly. There are many reasons why an LLC can be dissolved, but regardless of this, what matters is that your company knows how to close properly. Include step-by-step instructions starting from getting consent from all members to settling remaining debts before closing completely.
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 North Dakota LLC Operating Agreement?
An Operating Agreement in North Dakota costs nothing if you create your own. There are also no filing fees since the state does not require it. If you hire a lawyer to help you draft an Operating Agreement, be prepared to spend up to around $200 or so, depending on the task.
Frequently asked questions
The state does not require single-member LLCs to file an Operating Agreement. These companies, however, will benefit much from the security and stability that the document provides. Single-member LLCs will look and feel more like an incorporated business than a sole proprietorship.
Yes, if you included provisions allowing changes to be made to the document. You will need to update your Operating Agreement from time to time so that it accurately reflects the changes in your LLC. Failure to update the document can render it useless or ineffective.