Why should a North Dakota LLC have an operating agreement?
A North Dakota 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.
The North Dakota Uniform Limited Liability Act provides ground rules for LLC operating agreements, but it does not specifically state that North Dakota LLCs must 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.
You don’t need to include the names of all (or any) LLC members when filing your North Dakota Articles of Organization. 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 an operating agreement includes the names of all LLC members, you can use it to show that you own your business. This is helpful for important tasks like opening a business bank account and renting office space—both banks and landlords will ask to see your 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.
Disagreements and misunderstandings happen—it’s probably inevitable. But having an operating agreement with agreed-upon rules and procedures for your business can prevent those misunderstandings from flaring up into big issues.
4. An operating agreement can override North Dakota’s default laws.
If you don’t have an operating agreement, your LLC will automatically be governed by North Dakota’s default LLC statutes. The problem is that those default laws might not fit your business. Creating your own operating agreement helps to ensure you’re able to run your LLC in a way that works for your business.
North Dakota 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 Kramlich v Hale, where the members did have an operating agreement for their LLC, however the complex nature of the member’s business arrangement, couple with a lack of clarity and consistency within their company governing documents, allowed room for error and mistaken interpretation and understanding by the lower courts, specifically related to the arbitrable nature of the disputes among the members. Despite the judicial intervention by the lower courts, and after extensive and expensive litigation, the Supreme Court weighed in and overruled the lower courts, explaining that the express language within the operating agreement executed among the LLC members was applicable and clearly required the LLC issues to be submitted to arbitration, and not to the court system.
“Had the members taken the time to plan ahead, discuss potential friction points, and distilled their understanding into writing, then valuable resources could have been preserved for more fulfilling purposes. Going further, the parties in the Kramlich case would have also benefited from discussing the inconsistencies between their partnership enterprise and their LLC enterprise, and if such inconsistencies should remain or be resolved. The Kramlich case is an excellent example of how much specific language matters within company agreements, especially why it is important to adopt and maintain internal governing documents (like an operating agreement). 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 Dakota operating agreement?
According to North Dakota Century Code Ch. 10-32.1-02, your operating agreement can be oral, recorded (written), or implied. But having a strong, written operating agreement is essential. A good North Dakota operating agreement 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
