Why should a New Jersey LLC have an operating agreement?
A New Jersey LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.
New Jersey’s NJ Rev Stat § 42:2C-11 lays the groundwork for LLC operating agreements, but it does not explicitly state that you need to have one. However, you will need an operating agreement to maintain your LLC. Here’s why:
1. Your operating agreement proves you own your LLC.
You don’t have to include the names of any of your LLC members when you file your New Jersey LLC Public Records Filing. That’s great for maintaining privacy, but it doesn’t help you show proof of ownership. This is where your operating agreement comes in.
Your operating agreement includes the names of all members, which means you can use it to show that you own your business. This is important when opening a bank account or renting property, since both banks and landlords will ask to see proof of ownership.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability status, business owners must show that their LLC is its own legal entity separate from its members. One way to do this is to open a separate bank account for your LLC. Another way is to create (and follow) an operating agreement.
3. An operating agreement can help head off misunderstandings.
In the process of running your LLC, it’s probably inevitable that you’ll encounter internal disagreements and misunderstandings. But with an operating agreement to establish agreed-upon rules and procedures for your company, you can help prevent those issues from blowing up into big problems down the line.
4. An operating agreement can override New Jersey’s default laws.
Without an operating agreement, your LLC will automatically be governed by New Jersey’s default laws. The problem is that these statutes might not work for your business. With an operating agreement, you can ensure your LLC is run in a way (within the law) best suited to your business.
New Jersey Case Law
We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*
“Consider the case of Kuhn v Tumminelli, where the managing member cashed LLC checks to be used for personal purposes, leading to a dispute between the members. Unfortunately, because the members failed to adopt an operating agreement for their LLC, the courts applied the default LLC rules outlined in the statutes, rather than looking to the oral understanding between the members. While examining the statutes for the applicable rules, the courts reinforced the importance of a written operating agreement due to its ability to deviate from and modify many of the statutory default rules.
“Had the LLC members thought ahead and thoroughly discussed potential problems, distilled their intent and understanding into an operating agreement, this particular issue may not have ever developed, and even if it had, the other member may have been able to have a much more favorable outcome. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a New Jersey operating agreement?
While you don’t have to file your operating agreement with the NJ Department of State, that doesn’t make it any less important than your LLC’s public documents. A strong operating agreement is essential, and should include information about:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Management
- Compensation
- Bookkeeping procedures
- Dissolution
