For New York LLC’s, the law requires members to enter into an operating agreement. Often, legal requirements turn into normal checklist items, and operating agreements dangerously contain the bare minimum.

In an LLC, the members do not hold shares of stock. Thus, the rules and procedures of an LLC are set forth in an operating agreement, not a shareholder’s agreement. Like a shareholder’s agreement, an operating agreement should define the rights and responsibilities of the members among each other and as to the LLC. Often, operating agreements go further, also defining the manner in which the LLC will be operated.

An essential element of an operating agreement is the identification of a “managing member.” The managing member is typically responsible for the day-to-day management of and decision making for the LLC. These responsibilities can be defined in any way that the parties agree.

What happens if a non-managing member disagrees with the actions of the managing member? This exact scenario was brought by a client to the CMM litigation team. New York’s LLC law provides procedural remedies, all of which involve litigation, lawyers, judges, and often juries. In other words, cost, time, and uncertainty. While CMM successfully negotiated a favorable resolution, the time and expense might have been avoided by the existence of a sufficient operating agreement.

Imagine that the LLC’s operating agreement had its own dispute resolution procedure built in. One where a dissenting member could properly and in the best interest of the LLC challenge the managing member’s decision. The members and the LLC would have exponential economic, temporal, and emotional savings.

At CMM, we recommend annual business checkups to avoid unnecessary disputes. Learn more:

For more input and guidance on business divorce, reach out to David Green at 631-738-9100.

Thank you to Alex Tomaro for his research and writing assistance.