What your Lawyer needs to know before drafting your LLC Operating Agreement

Aside from the obvious questions such as “what is the name of the entity?”, you should think about the following issues before asking your attorney to start drafting your limited liability company operating agreement for your multiple-member New York limited liability company (“LLC”).

1. Who is going to manage the business affairs of the LLC?

Unless you provide otherwise, the New York Limited Liability Company Law (NYLLC) provides for management by all the members (See Section 401).

2. Should members be prohibited from competing with the business of the LLC?

Normally, members have a duty of loyalty to the LLC, which means that the members have to act in the best interest of the LLC.  Competing with the LLC would most likely breach such duty of loyalty. Sometimes the members want to agree to something different.  Maybe it is understood that one member has another business that is potentially in competition with the new LLC.  It helps to spell it all out in the operating agreement.

3.  Are members allowed to withdraw from the LLC?

NYLLC default rule:  A member cannot withdraw prior to the dissolution of the LLC (See Section 606(a)).

4.  What are the members’ contributions (cash, services, or property) to the LLC?

The value of the members’ contributions determines their share of ownership in the LLC (so-called membership interest).

5. How are profits and losses of the LLC to be distributed?

NYLLC default rule:  In accordance with the member’s interest in (i.e. capital contributions to) the LLC (See Section 503)

6. Will you accept new members into the LLC?

NYLLC default rule:  A new member may be accepted into the LLC by a majority vote of the members (See Sections 402(c)(l)); 602).

7.  Should the death, retirement, or bankruptcy of a member result in the dissolution of the LLC?

NYLLC default rule:  The death, retirement or bankruptcy of a member does not result in a dissolution of the LLC (See Section 701(5)).


About Imke Ratschko

Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.