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Creating an operating agreement for a Limited Liability Company (LLC) in NC is not as complicated as you might imagine. It is simply a short outline of how your business will work. Even if there are multiple members of your LLC, you can still create the operating agreement and then discuss the details with the other members later. Can you already feel that rush of accomplishment that comes with getting the things done? Let’s look at how to go ahead and draft your operating agreement for an LLC in NC.
Why Draft an Operating Agreement?
An operating agreement governs the internal affairs of your LLC, including determining the rights and duties of interest owners, managers, and other company officials (and other future interest owners).
Your agreement sets forth your relations to:
- Other members of the LLC
- The LLC itself
- Your ownership interest or future rights to acquire an ownership interest
- Company officials relations with the LLC and the interest owners
Should a dispute between members arise, the operating agreement provides guidelines to resolve disagreements concerning the LLC and the rights and duties of the other members. The operating agreement specifies the decision process of interest owners and others in a conflict.
In negotiations or litigation, other attorneys or courts expect to see that your LLC reasonably relies on the written provisions in your operating agreement. An operating agreement can also protect your LLC in the event of an unexpected transfer of a member’s ownership, such as the death or divorce of a member.
Operating Fairly
When writing your operating agreement, the law considers it implied that you will operate in good faith and fair dealing. North Carolina law expects conscionable governing terms for administration and enforcement practices within your LLC.
An operating agreement spells out what your internal affairs will look like and lays out the rights and responsibilities of each person associated with your LLC. It addresses the function of your business and any disputes that may arise.
Even if you don’t have all the answers now, it’s vital to write your agreement to know how your business runs. However, despite the importance of an operating agreement, there is no requirement to file it in NC.
Writing the Operating Agreement
There are many online templates available to write your LLC operating agreement in NC including this free UNCW template. However, each LLC operates differently, has different goals, products, numbers of members, liability issues, and types of stock, property, and interest holdings. Using a template to write your operating agreement can help you navigate through the topics you need to cover, but it can’t advise you on the best options for your individual LLC.
Contacting your business formation attorney can help bring out the issues to focus on. According to the NC Secretary of State, you may also wish to consider these organizational activities before “opening your doors” including:
- Designate a Manager/Member (if you didn’t list them in the Articles of Organization)
- Consider admitting other members.
- Develop and execute a written Operating Agreement.
- Decide when the fiscal year will start and end.
- Adopt resolutions stating who is authorized to manage the LLC’s banking and related actions.
- Set up checks and balances to protect all parties
- Decide how you will be taxed
- Establish buyout provisions to address a member’s exit from the LLC
Tax Considerations
It’s essential to consider your business structure before drafting your operating agreement. There are significant benefits to an LLC taking an S-election for federal tax purposes. According to SBA.gov, without an S-election, LLC “profits and losses can get passed through to your personal income… However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.”
With an S-election, you may avoid some self-employment taxes and operate as an S-corp on the federal level while remaining an LLC in NC. However, your LLC will be subject to certain restrictions if you make an S-election. Talking with an experienced business attorney in the state of North Carolina can help you better understand the tax implications and requirements of the different business structures.
Just Do It
When planning to launch a new business, sometimes it’s best to just get it done.
If you are converting a partnership or sole proprietorship to an LLC, waiting to set up your LLC could negatively impact your business. Since partnerships and sole proprietorships do not protect against personal liability, delays in forming an LLC can extend the time period for which you are personally liable for the actions of your business. Once your LLC is formed, you can benefit from the limited liability protections it offers.
When forming a new LLC, it makes sense to meet with an experienced business formation attorney before creating your operating agreement. A business attorney has the experience and perspective to save you time and money in the long run.
We Can Help
At Hill Law, we help North Carolina businesses thrive from startup to successful enterprise. Our knowledge of business law and experience working with companies in the greater Raleigh area and across the state inform us of best practices for an LLC. We work with your vision and goals to set you up for success right from the beginning. We counsel regarding business structure, tax designations, state and local laws, contracts, and business operating agreements.
Whether you need a quick consult or an expert to walk you through everything related to your startup, we are here to help. Contact us today for an initial consultation and find out how you can get started with your business operating agreement today.