Operating Agreements for Nevada Limited Liability Companies

An operating agreement is an agreement between the members of a limited liability company regarding the operation and governance of the company. Usually, the agreement establishes the rights and duties of members and managers and also sets forth the rules for operating the limited liability company.

Operating Agreements are Optional (but not really):  There is no legal requirement for a limited liability company in Nevada to have an operating agreement. A single member or multi-member limited liability company can still be formed and function without one. However, serious issues can arise that would be eliminated if an operating agreement was in place, regardless if it is a single member or multi-member LLC.   Operating Agreement: Functions  A limited liability company’s operating agreement has four basic functions:

(1) An operating agreement provides a record of the organization of the limited liability company. An operating agreement usually contains information regarding the LLC’s creation, members, and transfer of assets (capitalization is a big issue for the courts).

(2) The operating agreement provides a roadmap of operations for the LLC. The limited liability shield can be lost if LLC assets are improperly distributed or are comingled with members’ assets, and the operating agreement can implement procedures to avoid this disastrous result. Established operating procedures can also protect the rights of members and avoid unintended dissolutions of the LLC.

(3) An operating agreement can also restrict the transfer of members’ interests and provide for smooth transitions through events like death, disability, or bankruptcy or a member. There can also be similar provisions to a corporate buy-sell agreement.

(4) The final function of an operating agreement is to modify the statutory default rules that would otherwise apply to the limited liability company. The Nevada Revised Statutes (NRS) Chapter 86 prescribes the default rules for limited liability companies in Nevada. An operating agreement gives the members the opportunity to create a management and operational structure that reflects their own particular needs.   Single-member LLCs:  I’ve had a few clients decline an operating agreement when forming a single-member limited liability company. While most of the above functions are unnecessary in a single-member LLC, an operating agreement is still desirable. Failure to properly organize and operate a limited liability company, especially with a single-member, can leave it vulnerable having the corporate veil pierced. With a single-member LLC, there are no adverse parties to monitor operations, so adhering to the formalities of a limited liability company (like drafting an operating agreement) are even more essential.

The lesson to be learned here is: don’t go without an operating agreement for your limited liability company. Hire a business lawyer to custom draft one for your LLC. You will need one, even if it’s not required.