The answer is technically No, but we’ll get to that.
Before we get to the matter at hand, you should know that it’s fairly easy to create an LLC in North Carolina. Once you’ve picked the name of your LLC, do a quick search on the Secretary of State’s (NCSOS) website to make sure the name is available and/or not substantially similar to another company’s pre-existing name. Once chosen, submit the Articles of Organization per the NCSOS instructions. And don’t overlook the requirement that your selected registered agent must have an address in North Carolina, otherwise your application will be rejected. After properly setting up your LLC, grab your Tax ID number through the IRS website, open your bank account(s), and then it’s time to start doing business.
We get a lot of calls or attend consultations with potential clients who ask many of the same questions, which is understandable. One of the most frequently asked questions is whether an LLC is required to have an Operating Agreement. The simple answer: No, it’s not required, but it is very much recommended to have one, especially for those multi-member LLCs, which will be touched on briefly below. As an FYI, even though you now know an Operating Agreement is not required, the banks are presently asking for proof of an Operating Agreement, even for single member LLCs, under certain circumstances. So, if you’re thinking about taking out a loan or getting some other form of financing, they may want to see one.
The better question is “should” your LLC have an LLC. The answer to that question: Yes, you should, whether you’re a Single Member or Multi-Member LLC. Operating agreements cover many topics, such as how the company will operate, who will control the day-to-day operations, how will profits be disbursed, how to bring on new members, how to kick out current members, how you/it will be taxed, and how to value your membership interests in case of a buy-sell event, which should also be covered in the Operating Agreement. Single Member LLCs need an operating agreement less frequently, but that’s because you’re the only member and you run the show. But again, this will depend on many things, including what type of business you’re in and whether you forecast bringing on future members. If you think you may bring on additional members in the future, then you may want to address things like what that person/entity has to do to be admitted, how much they must pay for the membership interest, and, likely more importantly to you, how you would get bought out when you’re ready to retire. Trust me, you likely don’t want to negotiate that when you want to retire.
Now if we’re talking about multi-member LLCs, I always recommend an Operating Agreement and I always recommend that it be done very early on in the life of the LLC. Typically, business partners are getting along fairly well during the first couple of years. But like in family law, some business partners have a falling out or disagreement that cannot be resolved. If you do not have an Operating Agreement you’ll be held to our statutes, which you may not be happy with. Again, the Operating Agreement should not only talk about how the company is to operate, but more importantly what to do when a dispute arises between business owners. It will also address how voting is handled, such as who must be present, what must be unanimous, by super majority, or by simple majority. If you don’t have an Operating Agreement, all too often the dispute lands in Court, which can be very costly to all those involved. Operating Agreements can keep you out of court and can keep money in your accounts, not ours (the lawyers!). I think it’s a safe bet to say that the cost of having an Operating Agreement drafted versus the cost of going to Court is not even close.
If you have questions about your limited liability company, please feel free to contact us. We’d be happy to help.
by Attorney Matt Marcellino