What Are Operating Agreements
Operating agreements are the governing documents for business structures such as limited liability companies (LLCs) and limited liability partnerships (LLPs). While most people are familiar with what a corporation is and what it does, they might not be acquainted with these other, less common forms of business structure.
LLCs and LLPs are both similar in that they are entities owned by the members of the company. These types of business structures differ from corporations in that they are not required to have a board of directors or hold annual shareholder meetings, and they are not subject to the same rigid operational protocols and taxes that go along with a traditional corporation. These factors add a lot of flexibility to operating agreements.
However, one of the primary purposes of an operating agreement is to set forth the operating procedures, rules and policies governing the company . Since an LLC or an LLP is owned by its members, the operating agreements of these entities are often drawn up and agreed to by the members to provide clear authority and mechanisms for resolving disputes, managing day-to-day operations and protecting the interests of all involved.
The operating agreement should be comprehensive, and should include provisions pertaining to:
Who decides how much capital contribution each member has?
How and when profits and losses are distributed?
What happens upon the death of, or withdrawal of, a member?
All of this information can be tailored to fit any specific situation and any changes can be made later with the appropriate amendments. However, if you don’t have a good operating agreement in place to start, you might find your business impacted by issues that could have been avoided with a proper, comprehensive and enforceable operating agreement.
Notarizing an Operating Agreement: Legal Process
Different jurisdictions have different requirements for the notarization of operating agreements. Florida, for example, does not require notary acknowledgement for an operating agreement but does require that every member which has the power to manage the limited liability company signs the agreement (Florida Statutes 605.1102). In others, like Arizona, notary acknowledgement is expressly required under their LLC statute (see A.R.S. § 29-1104(N)). In Connecticut, written operating agreements are governed by the state’s Uniform Partnership Act and are enforceable without notarization (Conn. Gen. Stat. §34-31 et seq.) but the underlying contract may require it. (See Mudge v. Mudge, 2003 Conn. Super., LEXIS 1140 (C.G.S. 2003) (the Court noted that all contracts or writings are required to have a proper signature thereon and to have an acknowledged signature thereon to make it valid.) There is no requirement under New York state law which mandates that the operating agreement to explicitly require notarization (N.Y. Bus. Corp. Law, §§ 103, 605 and 606). However, if any party subscribes his or her name to the operating agreement, it may be enforceable as long as the individual did not intend to revoke it prior to signing. (N.Y. Bus. Corp. Law, § 103.) Ultimately, there is a common thread among the jurisdictions which places the burden on the parties themselves to determine whether the operating agreement needs to be notarized. There are just two important points to consider: if your jurisdiction does require notarization then you’re required to have it but if your jurisdiction doesn’t specifically require notarization then whether to notarize the operating agreement is usually dictated by the underlying contract.
Pros of Notarizing Operating Agreements
Notarizing an operating agreement can provide a range of potential benefits to your business. Depending on the particulars of each situation, however, it may not be necessary.
In general, when an operating agreement is notarized, it can add a layer of legal protection, assurance of authenticity, and reduce the potential for disputes among relevant business partners.
Legal Protection
One key benefit of notarizing an operating agreement is that it can offer a greater degree of protection to the parties involved by minimizing the likelihood that the terms of the operating agreement can be challenged in a court setting in the event of a dispute or any other legal action. The more formalized the process becomes, the less likely it is that one or more parties will attempt to alter or do away with the agreement.
However, in addition to getting an operating agreement notarized, the parties may be wise to consider further legal protections such as maintaining thorough records of all actions related to the business entity (i.e. notices, consents, meetings and other records). These records may be used as evidence in any disputes, providing a clear history of how the business has been treated and who has made decisions related to it.
Authenticity
Another benefit of notarization is that the Notary is an impartial third party, meaning that the individual can testify as to the day the document was issued, and the identity of the individuals at hand. This is especially valuable when there are any disputes over the validity of the document.
Eliminating Disputes between Partners
Having all partners acknowledge the authenticating process of notarization can also help eliminate potential disputes about how the terms of the operating agreements should be governed, as well as how modifications to it can be handled. When one partner alters the terms of the agreement (whether intentionally or not), the additional protection of the Notary can be invaluable to the business entity.
Some states do require that operating agreements be notarized, but if you’re in a state where it’s not necessary, it may still be in your best interest to go along with the process. The added legal protection notarization provides is often worth the slight amount of extra expense involved.
Cons and Things to Consider When Notarizing an Operating Agreement
While notarization is not normally required, it may be a consideration for business owners who plan to add new members or want to enforce specific succession planning provisions. Since operating agreements (OAs) are private contracts between the members, generally speaking, it’s up to the members to agree upon the terms and consequences if the terms are violated. In the event a member does not abide by the terms, the other members need to provide the noncomplying member notice of the violation and the opportunity to be heard, as well as give a reasonable amount of time for the violations to cease. Then, a majority of the members must vote to cancel the contract. This may seem straightforward enough, but the process becomes tedious when members realize that the contract must be notarized and recorded. If members elect not to notarize the contract, the company may have to go to court to enforce its rights if a member doesn’t comply with the terms; however, if the contract is notarized and filed, the court will immediately grant enforcement authority to any other members under the company’s rules and regulations. This means that people outside of the company will be significantly involved in the enforcement process and will have access to the company’s records. Furthermore, notarization may cost the company extra in the form of filing fees and travel expenses. Some states charge anywhere from $5 to $40 to notarize an agreement which, on its own, is not terribly steep. However, if members have to physically travel to a bank, law office, or accountant’s office to notarize the agreement, the time spent and payroll spent getting to those locations can become substantial. OAs are already prone to lengthy drafting and negotiation processes, so adding a time cost at the end can be extremely frustrating. Going one step further, it’s not just the cost of notarization that is important; it’s also the time it takes for a notarized agreement to process through the court system. Some courts take a long time to process documents they receive through the mail, while others process documents faster. In either case, members may end up waiting a long time to see the agreement approved and enforced and, in turn, lose rights they thought they had secured by going through the effort of notarization.
How to Notarize an Operating Agreement: Step-by-Step Guide
If you have decided to have your operating agreement notarized to ensure its validity in case of disputes, the first step is to prepare a copy of the operating agreement that is going to be notarized. There is no specific requirement that the notary public has to have the original document. As long as the copy of the document is an exact replica of the original agreement that was entered into, it will suffice.
Next, you need to find a notary public who is available to notarize the operating agreement. This can be done by visiting your local bank or credit union, your real estate agent, or even at your local library. If you are unable to find a notary in your area that is available for you, there are courier services in many areas that may include notaries as part of their services.
Once you have the copy of the operating agreement with you , you need to take it to the notary. The notary will compare your operating agreement with the original one to ensure there are no discrepancies between the two. The notary will then ask you to sign the operating agreement in his or her presence. Once you have signed the operating agreement, the notary will then sign it and affix his or her seal to it as well. At this point, the notary needs to fill out a notarial certificate. This is essentially a receipt for the notary’s service and contains details about the notarization including the name of the state and county where the notarization took place, the date of the notarization, and any other relevant details about the transaction.
The final step in ensuring a proper notarization is to keep your copy of the notarized operating agreement secured in a safe place that is easily accessible to all the members of your LLC. A safe deposit box is a good place to keep it if you have one. Otherwise, a locked desk drawer or fire-proof safe that is easily accessible can be a good alternative.
Notarizing Operating Agreements: Common Myths
Just because both you and the other co-owners of an LLC or corporation all sign the operating agreement and bylaws, does not automatically make it a binding legal document. In order for documents to be binding and valid under the law, you and the other owners might need to: sign the documents in front of a notary public, exchange copies of the documents, or both.
1. All legal documents must be notarized.
False – In some states, not all documents need to be notarized. Some documents are valid once the parties have signed them, given each other a copy, and the notary acknowledges the signatures with their seal.
2. Not all states require notarization for LLC documents.
True – Every state has different requirements for what types of documents require notarization. In some states, a few key documents need to be notarized, while in other states, most, if not all, of the organization’s legal documents must be notarized.
3. Once a document has been notarized, it’s always binding.
False – If the notary failed to follow proper procedure when notarizing the document, or the document was altered after notarization, the document may have no legal effect.
4. If I notarize papers now, I won’t have to do it again later.
False – If the person paying the notary fee doesn’t specify to notarize the document, or one of the parties has expired identification, they may have to notarize the document again. Further, if there’s a second page, they will have to notarize each page separately unless the document has been "allongaed." An allongaed document is a long document that has had an additional piece of paper with the notarization added to the end of the document, thus eliminating the need to notarize every page.
5. Notaries get unlimited authority while notarizing documents.
False – The vast majority of the time, once the company’s annual meeting has been held, the officers are appointed to sign for the company on their behalf. If the operating agreement and/or bylaws do not specifically mention that the main shareholder signs and has the authority to sign for the company, the other shareholders can challenge that person’s authority to sign for the company in court.
6. Notarization is only needed for one document.
False – Some states require notarization for all documents, while others only require certain documents to be notarized. In some cases, they require some documents to be notarized, while the others just need to be signed.
Conclusion: A Well-Educated Decision
In conclusion, the decision to notarize an operating agreement is one that should be made after careful consideration of the specific legal requirements and benefits associated with notarized documents in your particular state. Generally, the notary process can provide an added layer of authentication and security, especially for binding contracts like operating agreements. A notarized document can make it harder for parties to commit fraud, sign documents retrospectively, or deny ever signing an operating agreement altogether.
Operators of new businesses should check what the laws are in their state , as these can vary from one jurisdiction to the next. Some states also allow for electronic notarization. You should also consult with an attorney to ensure that the notary process is executed correctly, as errors can make notarization invalid.
As operating agreements can have a significant impact on the management and structure of a business, ensuring that your document is notarized is a quick and easy step to increasing the security of your operating agreement, and peace of mind for all involved.