Operating Agreement LLC New Jersey

A Limited Liability Company (LLC) Operating Agreement is a foundational document defining internal operations and relationships within the business entity. While many focus solely on initial formation, understanding its role is crucial for long term success in New Jersey.

Operating Agreement Requirement in New Jersey

The law does not require an LLC to have a written operating agreement under the New Jersey Revised Uniform Limited Liability Company Act (Section 42:2C-11). Because it is not mandatory, some owners may overlook it. However, forming and managing a business without one can lead to significant cost and conflict down the road.

Core Function of an Operating Agreement

An operating agreement is essentially a written contract among the LLC’s members (owners). It functions as the controlling agreement that sets forth:

• the relationship among the members and between the members and the LLC;
• the ownership structure;
• management structure and authority;
• voting rights;
• dispute resolution;
• rules for transfers;
• scope of business activities.

Essential Benefits of the Document

Even though filing the operating agreement is not mandatory, there are three primary reasons why owners should prepare one for their New Jersey LLC:

Protecting the Limited Liability Status

Forming an LLC provides limited liability, shielding members from personal liability for the company’s debts. This protection can be compromised if members or managers fail to treat the LLC as a separate entity. A comprehensive written operating agreement helps ensure proper formalities are maintained, reducing the risk of personal liability. For a single member LLC, having a written agreement helps demonstrate that the business is operated as a separate legal entity, thereby supporting its limited liability status.

Providing Clarity and Preventing Conflict

The operating agreement clarifies ownership structure and management responsibilities, helping prevent misunderstandings among members. By establishing a clear framework for governance and decision making, the agreement defines each member’s rights and obligations.

Resolving Deadlocks and Disputes

Disagreements among owners can escalate into conflicts that threaten the business. A well drafted operating agreement anticipates potential disputes or deadlocks and includes mechanisms for resolving them. These mechanisms can spare the LLC from costly litigation. The agreement can also outline steps for voluntary or involuntary dissolution and distribution of assets.

New Jersey LLC Management Structures

The operating agreement must define how the business will be managed. Two common structures in New Jersey are:

Member managed LLC

All members have authority to bind the LLC in contracts and handle day to day operations.

Manager managed LLC

One or more designated managers run the business and legally bind the LLC; the members act in a passive or investor role, but retain certain voting rights (such as adding or removing a member).

In both cases, member voting power is typically proportionate to membership interest.

Key Content Required in the Operating Agreement

The agreement should be maintained with LLC records and all members should receive a copy.

Structural Details

It should include the LLC’s name, effective date, business purpose, duration, registered agent (if applicable), and tax classification (for example sole proprietorship, partnership, S corporation, or C corporation). Note: New Jersey is not a community property state and a New Jersey LLC cannot be taxed as a qualified joint venture.

Financial and Ownership Details

List all members, ownership percentages (membership interests), and initial capital contributions to the LLC. The rules for member voting should be specified (for example majority vote or vote by membership interest).

Government Entities and Filing

The operating agreement is an internal document and is not filed with the New Jersey Department of the Treasury or any other government agency. It becomes legally binding when signed by the members; notarization is not required.

To form the LLC, you must file Articles of Organization with the Secretary of State and obtain an EIN from the Internal Revenue Service and register the LLC with the Division of Taxation. If the LLC faces litigation or an audit, a court or agency might request to see a copy of the operating agreement. If a remaining member’s successor continues the business, appropriate filings must be made with the Department of the Treasury.

The agreement is governed by and must be construed under the laws of New Jersey, in particular the New Jersey LLC Act. For matters not addressed in the agreement, the Act governs.