The Importance of Operating Agreements for New York LLCs: Why Even a Single-Member LLC Needs One
If you’ve formed a Limited Liability Company (LLC) in New York, you might think that filing your Articles of Organization is all you need to do. However, New York legally requires LLCs to adopt an Operating Agreement—even if you’re a single-member LLC.
An Operating Agreement outlines how your LLC will be managed and helps prevent disputes between owners. While it doesn’t need to be filed with the state, it must be adopted within 90 days of formation. Failing to create one could leave you vulnerable to legal and financial issues.
For LLCs with multiple owners, not having an Operating Agreement can be disastrous, leading to disputes over ownership, management, and profit distribution. Here’s why every New York LLC should have one—and what can go wrong without it.
What is an Operating Agreement?
An Operating Agreement is a legally binding document that sets the rules for how an LLC will operate, including:
– Ownership structure (who owns what percentage of the business)
– Management rules (who makes decisions and how)
– Profit and loss allocation
– Dispute resolution procedures
– Exit strategies (what happens if an owner leaves)
Even though New York law requires every LLC to have one, many businesses skip this step. That can be a costly mistake, especially for LLCs with multiple members.
New York’s Legal Requirement for Operating Agreements
Under New York LLC Law (Section 417), all LLCs—whether single-member or multi-member—must adopt a written Operating Agreement within 90 days of filing the Articles of Organization.
While New York does not require you to submit the agreement to the state, failing to create one could expose you to legal uncertainty if a dispute arises.
If you don’t have an Operating Agreement, the state’s default LLC laws will govern your business—often in ways that aren’t favorable to you.
What Can Go Wrong Without an Operating Agreement?
1. Ownership Disputes Can Derail the Business
If multiple members disagree on who owns what, who has decision-making power, or how profits are split, things can quickly get messy.
📌 Example: Two business partners assume they are 50/50 owners, but one contributed more startup capital. Without an Operating Agreement specifying ownership percentages, a major dispute arises when the business becomes profitable.
Without a written agreement, courts will default to New York’s LLC laws, which might not reflect the members’ actual intentions.
2. Deadlocks Can Paralyze Decision-Making
New York law doesn’t provide a clear solution for when LLC members can’t agree on a major business decision. Without an Operating Agreement outlining decision-making rules, a 50/50 deadlock can halt operations or even force dissolution of the LLC.
📌 Example: A two-member LLC disagrees on whether to take on a new investor. With no Operating Agreement specifying a tie-breaking mechanism, they reach an impasse and must take the matter to court—or dissolve the business.
3. New York’s Default Profit-Sharing Rules May Not Match Your Intentions
Under New York law, LLC profits and losses are split equally among all members unless stated otherwise in an Operating Agreement. This means that even if one member invested more capital or works significantly harder, they still receive an equal share unless an agreement specifies otherwise.
📌 Example: One partner contributes $100,000 to start the business, while another contributes $10,000. Without an agreement stating otherwise, New York law may require profits to be split 50/50, regardless of investment.
4. An Owner’s Departure or Death Can Create Chaos
If a member leaves, dies, or becomes incapacitated, what happens to their share of the business? Without an Operating Agreement, their ownership interest may pass to their heirs, potentially bringing in new, unwanted partners.
📌 Example: A three-member LLC loses one owner unexpectedly. Their spouse inherits their share and wants to sell it to an outside party. The remaining owners have no right to stop the sale because no buyout terms were defined in an Operating Agreement.
This can lead to ownership disputes, financial strain, and even dissolution of the LLC.
5. Lack of Liability Protection
One of the main benefits of an LLC is limited liability, meaning owners aren’t personally responsible for business debts. However, if you don’t have an Operating Agreement, a court might disregard your LLC status, making you personally liable.
📌 Example: A business is sued, and the court finds that the owners failed to follow formal business procedures because they had no Operating Agreement. The court pierces the corporate veil, making the owners personally responsible for debts.
6. Bringing in New Owners (or Selling Your Interest) Can Be Complicated
Without an agreement in place, adding new members or selling your ownership share becomes unpredictable. New York’s default LLC rules may force unwanted ownership changes, or members may have no say in who joins the business.
📌 Example: One member wants to retire and sell their share of the business. The other members can’t agree on a valuation, and with no buy-sell provisions in place, the situation escalates into a legal dispute.
Why Even Single-Member LLCs in New York Need an Operating Agreement
Even if you are the only owner of your LLC, an Operating Agreement helps by:
✔ Maintaining limited liability protection (proving your LLC is separate from you personally)
✔ Establishing business continuity (in case you bring in partners or sell the business later)
✔ Preventing legal challenges to your business structure
Since New York requires an Operating Agreement, it’s always best to have one in place from the start.
What Should Be in Your Operating Agreement?
A strong Operating Agreement should include:
🔹 Ownership percentages & capital contributions
🔹 Decision-making authority & voting rules
🔹 Profit and loss allocation
🔹 Buyout & succession planning
🔹 Rules for adding/removing members
🔹 Dispute resolution procedures
Conclusion
If you own an LLC in New York, an Operating Agreement isn’t optional—it’s legally required. But beyond compliance, it’s one of the most important legal safeguards for your business. Whether you’re a single-member LLC or have multiple owners, having a clear, customized agreement protects you from future disputes and legal headaches.
💬 Need help drafting an Operating Agreement for your New York LLC? Contact me today to ensure your business is protected and compliant!
Ready to get started? Let’s talk today.