Why should a North Carolina LLC have an operating agreement?
A North Carolina 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.
While NC Gen Stat § 57D-2-30 (2019) lays the ground work for operating agreements in North Carolina, it doesn’t explicitly state that North Carolina LLCs are required to have an operating agreement. However, you will need an operating agreement to maintain your LLC. Here’s why:
1. Your operating agreement proves you own your LLC.
Your North Carolina Articles of Organization don’t require the names of any members. This is great for maintaining privacy, but it doesn’t help you show proof of ownership. This is where your operating agreement comes in.
Because it includes the names of all members, you can use your operating agreement to show that you own your business. This is necessary when it comes to opening a business bank account and renting property, as banks and landlords typically ask to see an LLC’s operating agreement.
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.
Unfortunately, people disagree and sometimes misinterpret information—there’s no way around it. But with an operating agreement with established rules and procedures for your company, you can prevent these issues from flaring up into bigger problems.
4. An operating agreement can override North Carolina’s default laws.
If you don’t have an operating agreement, your LLC will automatically be governed by North Carolina’s default laws. The problem is that these statutes might not work well with your company. Adopting an operating agreement helps ensure that you’re able to run your LLC (according to the law) the way you see fit.
North Carolina 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 HCW Retirement & Financial Services, LLC, where a lack of clarity resulted in litigation among the members pertaining to the language of the operating agreement. Because the members failed to clearly set out the process in the operating agreement for how disputes would be resolved, the members had to expend valuable resources for over 2 years within the court system, only to have the dispute kicked all the way from the state supreme court back to the trial court to ultimately be ‘remanded’ (sent) to arbitration.
“Had the members clearly expressed their intent and understanding in their operating agreement early on, then the valuable resources spent on litigating the various interpretations of the operating agreement could have been preserved for more fulfilling purposes. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a North Carolina operating agreement?
According to NC Gen Stat § 57D-1-03, your operating agreement can be “written, oral, or implied.” However, an intangible agreement won’t holdup in court. A strong, written 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
