Business owners form a limited liability company (LLC) because it protects their personal assets, has no double taxation, and has flexible management options. An LLC is also easy to create. You file the paperwork online with the Secretary of State, pay the fee, and are now a registered company. However, you should go one step further and write an in-house operating agreement that all the members sign. Although North Dakota does not require this document, it is a legal agreement designed to avoid future confusion and misunderstandings.
Operating agreement overview
Business laws can be complex, and the operating agreement lays out the governing rules and regulations the company must follow. The author of this binding agreement must have an in-depth knowledge of applicable state and federal laws. There are three strong reasons why an LLC should have an operating agreement.
1. Protection from creditors
The operating agreement proves that the organization is a company with one or more members. As such, a member’s personal assets are safe from seizure by creditors as long as it is clear that their business transactions are not private actions.
2. Written confirmation of terms
Putting everything in writing clarifies oral agreements. All members should participate in a group discussion to ensure the document covers all the issues and agreed-upon terms among the members.
3. Provides state-recognized rules of governance
In North Dakota, default business rules will govern disagreements and lawsuits if a business does not have a written operating agreement. The state’s regulations might contradict how the members intended the company to operate.
Operating agreement membership details
An operating agreement may range anywhere from one page to 20 or more pages, depending on the complexity of the business. However, every document should at least address the following areas of interest:
- Percentage of ownership for each member
- Voting rights
- Profit distribution
- Responsibilities of members and managers
- Procedure for transferring interest if a member dies or resigns
- Method for allowing new members to join the LLC
- Process for settling disputes
Ensure that you take the time to draft a comprehensive operating agreement so that you can build your business on a solid foundation.