New York's LLC Law Fosters Greater Certainty for Members and Their Rights

It is often said that being in a business partnership is a lot like being in a marriage. When times are good, business relationships tend to be strong, with partners working together towards common goals. But like a marriage, businesses often fail due to breakdowns in the relationships among the owners. In the case of a limited liability company (LLC), an operating agreement is a lot like a prenuptial agreement—a sometimes difficult topic to discuss in the beginning of a relationship, especially for new and idealistic entrepreneurs, but an important agreement to have in place in the event of disharmony. Not having an operating agreement is akin to entering into an arranged, blind marriage—rife with potential surprises. And although the implications can vary from state-to-state, this article addresses key differentiators to be aware of, using New York and Delaware law as examples, when the members of an LLC fail to adopt an operating agreement in writing at the outset of their relationship.

Oral or Implied Agreements

Some jurisdictions, like Delaware, offer a very high degree of flexibility to members of an LLC in deciding how they want to reach an agreement regarding the governance of their business and affairs. The Delaware Limited Liability Company Act, 6 Del.C. §18-101, et seq. (the Delaware LLC Act), provides that a “Limited liability company agreement” may be “any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise), written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.” See Delaware LLC Act §18-101(7) (emphasis added). This is consistent with the various iterations of the Uniform LLC Act, promulgated by the National Conference of Commissioners on Uniform State Laws.¹ Allowing such oral or implied agreements would seem to be consistent with one of the policies of the Delaware LLC Act, which is to give “the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” See Delaware LLC Act §18-1101(b).² But in truth, allowing for oral or implied operating agreements is fraught with potential pitfalls for the inexperienced and unwary.