What is an LLC Operating Agreement?
An operating agreement is a document that certain types of businesses draft and execute which outline the company’s financial and functional decisions. Moreover, the resulting document is used primarily as an internal document with a purpose of regulating the administration of the company. It is important to understand that an operating agreement is especially popular amongst individuals who have started a limited liability company (hereinafter, "LLC"). The purpose of an LLC operating agreement is to act as a type of a corporate "bylaws" (i.e., governing structure, etc.). Because of the "newness" of this type of document, however , some may not understand its true purpose.
To best illustrate the purpose of an LLC operating agreement, consider the following: if a group of friends was to start a business, after asserting the business through a New York LLC formation process, the group should draft an LLC operating agreement. Specifically, the document should be reviewed so as to allow for each member to know when and how profits will be shared; the voting regime which will be implemented; the distribution of ownership between the various members; the various roles which will exist within the company, specifically, the officer positions (i.e., President, Vice-President, Secretary, Treasurer, etc.); who is authorized to sign contracts on behalf of the company, etc.
Legal Guidelines for Notarization
In general terms, notarization is the act of having a notary public witness a signature on a document for the purpose of preventing fraud, properly identifying the person who signed it, and to make outsides aware that the document is intended to be valid according to the law. Legal requirements concerning notarizations come from each state and are meant to help prevent fraud in the event that a document is called into question at a later time. While some states are more flexible about who may act as a notary, others are more strict. To become a notary, you must take and pass a test in your state, often have a clean criminal record, and sometimes undergo background checks (some states are stricter than others). Notaries are included in the public records of their state and must keep a journal of all transactions as well as their stamp.
What does this mean for LLC operating agreements? In most states, an operating agreement does not need to be notarized, but in a few states, it does. For example, in Missouri, if the LLC includes provisions in the operating agreement that amend the intent of the LLC statute, the signatures must be notarized for those amending provisions to be valid. An amendment to the intent of an LLC statute (which is frequently done when drafting an operating agreement) occurs when the parties to the operating agreement intend for the statute not to apply to any part of their agreement, and their agreement reveals that to be their intention. In other states, such as Georgia, for example, notarization is not required at all. Notarization laws differ from state to state.
State-By-State Notarization Requirements
State-specific rules and regulations exist for the notarization of operating agreements. Delaware requires notarized signatures for member-managed LLCs, managers of manager-managed LLCs, and authorized representatives of manager-managed LLCs. Kentucky and Florida also require notarized signatures of members of member-managed LLCs. In Mississippi, notaries public may administer oaths and affirmations. However, this may not be binding on third parties. Therefore, it is possible that an oath or affirmation by an LLC member who is not a notary public may carry the same weight. New Jersey requires notarized signatures from members of member-managed LLCs and managers of manager-managed LLCs. Rhode Island requires the signature of one-third of the members to be acknowledged. Tennessee requires notarized signatures of members of member-managed LLCs. Lastly, South Carolina requires notaries public to verify the signatures of LLC members who sign the operating agreement.
Advantages of Notarizing an LLC Operating Agreement
There’s not a legal requirement for LLC operating agreements to be notarized in order to make it valid. However, there are some potential benefits of having an operating agreement notarized: A Notarized LLC Operating Agreement Helps Establish Credibility Not all states require an LLC operating agreement to be notarized in order to be legally binding throughout the state. Even if your local legislation does not specifically require it, a notarized operating agreement will still clearly demonstrate that your LLC originally went through the proper steps by which an operating agreement can be established to provide written evidence of its existence. Without the credible evidence that a notarized agreement provides, you may find that some people do not recognize an un-notarized agreement to be official, even if your state law classifies it as such. A notarized LLC operating agreement helps avoid this problem by establishing credibility with any concerned parties or institutions. A Notarized LLC Operating Agreement Is More Likely to Be Enforceable In situations where an LLC owner personally owes debts that the LLC cannot pay, creditors can go after personal assets in order to satisfy the debts owed to them. This could mean taking away your right to use your personal assets or liquidating those assets in order to satisfy outstanding debts owed. Judges are tasked with finding ways to enforce debt repayment in a way that is sensitive to the circumstances. In the case of enforcing debts against an LLC member, judges are likely to turn to the LLC’s operating agreement for evidence about the nature of the business relationship. If, for example, the operating agreement makes no mention of the LLC owner making loans to the LLC, but a creditor says that it happened, the judge will likely be dissuaded from applying the loan concept in order to avoid finding debt repayment in the favor of the creditor, whereas if the operating agreement had been notarized, the judge might be more likely to honor the agreement as it was originally established. A notarized LLC operating agreement is just one extra layer that you can add to your LLC’s operating agreement in order to safeguard against negative outcomes. It can’t hurt to take the move and have your agreement fairly and accurately recorded in order to protect yourself from legal issues and validate your operating agreement.
Not Notarizing: The Consequences
If there is a loan involved in the transaction, the lender will usually require a notarized Operating Agreement. If there is no loan and there are disputes later between the members regarding the LLC and its terms, the lack of notarization could be an issue. The problem arises where the language of the Operating Agreement is in conflict with the language of the Arizona Limited Liability Company Act. In that situation, the Members may want to go back to the LLC Operating Agreement to prove their case. The problem with an unnotarized Operating Agreement is that the Arizona Limited Liability Company Act and case law (e.g. Manager v. Member , 245 Ariz. 63 (2018)) focuses on whether the documents sought to be admitted into evidence are business records, as opposed to requiring a signature to be notarized. If the Operating Agreement is not notarized, we would sometimes be presented with the issue of whether it meets the requirements to be considered a business record. In some situations the Member seeking the admission of the Operating Agreement has needed to resort to testimony from the Member who signed it to get it into evidence. As a result, the presence of a notarized Operating Agreement may be helpful in those situations. However, the safest route is to have all Members sign the Operating Agreement before notarizing it.
How to Get Notarization Done, Step by Step
Successfully notarizing your LLC’s operating agreement is a straightforward process. Your first step is to determine whether notarization is required in your state. If so, you continue by making sure all members, partners, and owners have signed the operating agreement as required. At this point, you’re ready to notarize the document.
- Have copies of the document available, but only one original document needs to be notarized. Prudent business practice requires that all parties keep a copy of the document anyway.
- Each person who is a party to the agreement must sign the document in front of the notary public. However, the individuals don’t need to do this at the same time. They can schedule the notarization one after the other.
- After signing the operating agreement in the presence of the notary, the notary seals it, stamps it, or otherwise indicates that it’s been notarized.
- Write out the date when notarization occurs.
- Do not count on the notary to enter their contact information. Make sure each individual will have it for their records.
Helpful Tip: Many people believe that other signatures on an operating agreement must be notarized. In fact, only the signatures of the members need to be notarized unless there’s another state-specific requirement to notarize other parties.
Frequently Asked Questions
Frequently Asked Questions About an LLC Operating Agreement & Notarization
Does it have to be notarized?
Depending on the state’s requirements it may or may not be required to be notarized. However, regardless of whether its required or not, it is not a bad idea to get it notarized. If your state does not require notarization, you might want to have it notarized if it is going to be necessary to show proof of your agreement in the event of an ownership dispute.
Is it going to cost a lot?
This depends on the state and the company. Generally speaking, as long a the company can be filed online, it will not cost you too much. In most cases you are looking at anywhere from $50-$350 to form an LLC online .
Do we need to hire an attorney to create the LLC operating agreement?
No, you don’t, but it is highly recommended. There are numerous online resources available for you to draft your LLC Operating Agreement, but if you take the time to actually read what it says, it is clear that almost NO ONE who is not an attorney would understand it. The biggest benefit of getting an attorney involved is that they will be able to customize the agreement specifically to your business to best protect you and your partners.
What if the operating agreement is not notarized?
Most likely you will be just fine, but it depends on your state law and what it says. It is best to check your LLC operating agreement State laws to see if it has to be notarized or not.