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During the LLC formation process, this document will help establish the ownership structure of your company and outline the rules and regulations for its day-to-day operations. Create one for its practical benefits and peace of mind.  

Read on for more information about Operating Agreements. You’ll find out why you need one, what to include, and when to update or revise it to further support your business.

What is a New Mexico LLC Operating Agreement?

A New Mexico Operating Agreement is a binding contract between limited liability company (LLC) members (the term for owners of an LLC). This document will contain the company policies, operational procedures, and roles and responsibilities of each member. It also includes other relevant issues, such as how to handle disagreements, money, and any plans for the future agreed upon by the members.

Once the Operating Agreement is read and signed by all the members, it becomes a legal document. The original copy is filed in the company records, and copies are given to members of the LLC.

Why do I need an LLC Operating Agreement in New Mexico?

An Operating Agreement is not required by law in the state of New Mexico, but you are strongly encouraged to create one when you file your Articles of Organization for the New Mexico Secretary of State since this document does not ask you to list all of the members of your LLC. With an Operating Agreement, you will have at least one internal document where the names of LLC members are recorded.

You will also need it if you plan to open a business bank account because it’s common for banking institutions to ask for an LLC’s Operating Agreement before allowing you to do so. Aside from adding credibility to your company, other benefits to drafting a New Mexico LLC Operating Agreement include: 

• Further protecting the liability status of the company: The Operating Agreement will serve as additional proof that the members of an LLC are separate from the company. If the LLC is faced with a lawsuit, this additional document helps keep members of the LLC from becoming personally liable for the obligations of the company. 
• Clarifying verbal agreements: If you are going into business with partners, you might have discussed what each member will bring to the table and your specific roles and responsibilities in the operations. But since launching and operating a business is a huge endeavor, wouldn’t you want to put everything in writing? Create a contract and make the agreement official. 
• Protecting the agreement in the eyes of the state: Without an Operating Agreement, New Mexico default rules will apply to your LLC. The same happens if you have an LLC Operating Agreement but did not provide any guidelines on a particular topic. The default laws are not unreasonable, but they might not be what you agreed on when you started the company. So, if you have specific provisions on how to run your company, you should draft an Operating Agreement. 

What do I include in my New Mexico LLC Operating Agreement?

The Operating Agreement will be tailored to your plans and goals for your business. It will outline the management structure and procedures for day-to-day operations. It will also provide guidelines for future events that may happen. Below are recommendations to help you draft a customized, comprehensive Operating Agreement. 

Items to include in your New Mexico LLC Operating Agreement:

1. Company Formation

This section of your Operating Agreement contains a lot of the same information that you put down in the Articles of Organization. 

This may include:

• Your legal LLC name
• Information regarding your New Mexico registered agent and registered office
• The purpose of the business
• The management structure of the LLC

2. Ownership

The Operating Agreement must include how the ownership of the company is divided. If you are the sole owner of the LLC, you own 100% of the business. Multi-member LLC owners can adopt an equal ownership structure or divide ownership by some other determination. 

Equal ownership means members will own the same percentage of the business regardless of their capital contribution. Members could also designate the percentage of ownership according to each member’s capital contributions or involvement in the business operations.

3. Duties of Members and Managers and Management Structure

In this section of your Operating Agreement, you will specify if your LLC will be member-managed or manager-managed. A member-managed LLC means the owners are involved in the everyday operations and decision making for the business. In a manager-managed LLC, a manager is appointed or hired to run and make decisions for the company. 

Include provisions for:

• Procedures for the appointment of managers 
• Qualification requirements for a manager
• Scope of authority of a manager
• Business decisions that need member approval

4. Voting Rights and Responsibilities

During the course of running your business, you’ll have to make decisions with your co-owners, such as accepting a new member, changing the tax classification of the company, or going from a member-managed business model to a manager-managed LLC.

This section of your Operating Agreement will cover how you’ll assign the voting power for each member. Many LLCs allocate voting powers by giving each member one vote. However, some companies designate voting powers according to membership interest in the business. This means that in an LLC with four members, if one member contributed 40% of the capital, everyone else holds 20% ownership each. That same percentage translates to their voting power.

Whichever method you prefer for your LLC, specify it in your Operating Agreement. Also, specify whether you only need a majority vote to resolve an issue or if you want a unanimous vote among the members at all times. 

5. Capital Contributions

The initial capital contributions of each member of the LLC is important information because it is often used to determine each member’s share of the profits and their voting power. 

Generally, members are granted ownership interest in a business through a contribution of cash, properties or goods for the use of the business, or for services rendered. Whether you accepted all cash or all forms of investment from a member, make sure to include all the information in your Operating Agreement.

6. Taxation

One of the advantages of forming an LLC is its flexibility when it comes to tax classification. By default, a single-member LLC is taxed as a sole proprietorship by the IRS. If you have two or more members in your LLC, your company is classified as a partnership. 

But if you are eligible, you may elect to change your tax classification to a C corporation or an S corporation. A tax professional can help you decide what’s most advantageous for your LLC.

How your company will be taxed will have a significant impact on your financial situation. But as members of an LLC, you probably have different needs and goals. So, it’s important to discuss this matter among yourselves before you decide. Whichever you choose should be expressly written in the Operating Agreement. 

7. Distribution of Profits

In this part of your New Mexico Operating Agreement, you’ll designate each member’s share of the profits of the company. You can choose to divide the profits equally, according to ownership percentages, or by some other determination. 

You’ll need to define guidelines on the following point of interests, as well:

• Will your company use the calendar year or a fiscal year to distribute profits?
• Will owners be able to draw from the business at will, or will profit payouts be done on a schedule?
• Will all profits be paid to members?
• How much of the LLC’s profits per year will be rolled over as capital?

Whether you are a single-member or multi-member LLC, you might need to consult an accountant to discuss your financial goals and tax brackets to figure out what profit allocation will work for you.

8. Succession Planning

Each member’s ownership interest in a company is their personal property. This means members can sell or transfer the ownership to whomever they want unless it’s prohibited by the Operating Agreement. To avoid disputes in the event that a member decides to leave the business, you need rules for sales or transfers of membership. Your New Mexico LLC Operating Agreement must also provide procedures to follow in case of a member’s death or incapacity.

Whether a member leaves the company voluntarily by way of retirement or resignation or due to circumstances such as personal bankruptcy, divorce, disability, incapacity, or death, it will still have a significant impact on the company. Putting plans in writing now will not only make the process easier, but it may also soften the blow. 

9. Buyout or Buy-Sell Rules

A buyout agreement could be a few clauses in the Operating Agreement or its own separate document. It could be a necessary addition for a multi-member LLC. In this section of your Operating Agreement, you should discuss what needs to happen if a member wants to withdraw from the company or if a third party wants to buy into the business.

What’s included in the buyout agreement?

• Whether departing members can force remaining members to buy their percentage of ownership
• If the departing member is allowed to sell or transfer their ownership to third parties, or if the LLC is exclusive for existing members only
• If remaining owners will be given the right of first refusal before the membership is offered to third parties
• How the price of the membership will be calculated and paid
• A description of events that can trigger a buyout of a member’s ownership interest
• A procedure for vetting a new member’s acceptance

10. Dissolution

Closing your business is an important conversation to have between you and your partners. It also opens up a discussion about each member’s vision of the company’s future. Your New Mexico Operating Agreement must include procedures to guide the dissolution and winding up of your company. An improperly dissolved LLC could cause you problems that might lead to you being personally liable for any obligations of the company.

In your Operating Agreement, give instructions and clarifications on the following:

• Who can initiate the dissolution 
• Who needs to vote to approve the closing of the business 
• Whether a majority vote approves the closing of the company or it needs to be a unanimous decision among all members
• How the remaining assets (after paying all debts and obligations) of the LLC will be divided

11. Severability Clause

You should close your New Mexico Operating Agreement with a severability clause. This is a standard legal boilerplate used in contracts. It is used to affirm that even if a section of the Operating Agreement becomes unenforceable under the state or federal law, it should not invalidate the rest of the agreement.

Updating and Revising Your New Mexico LLC Operating Agreement

LLCs are not subject to strict extensive record-keeping like a corporation, but you are advised to maintain an updated Operating Agreement to remain legally compliant. To maintain your LLC’s good standing with New Mexico, you must file Articles of Amendment with the Secretary of State for any changes to the following:

• Name of the company
• The purpose of your business
• Your registered agent’s information
• The tax classification of your business
• The management structure of your company 
• Any information previously provided in the Articles of Organization

You must ensure that you add provisions or revise your New Mexico Operating Agreement whenever there are significant changes to the organizational structure of your company, such as adding a new member or converting from a member-managed to a manager-managed model. 

Lastly, as your Operating Agreement is a binding document between you, your partners, and the company, it’s recommended that you revisit it yearly to make sure all provisions are relevant and enforceable to meet the specific needs and goals of your company. A good rule of thumb is to revisit your LLC Operating Agreement when you’re getting ready to file your annual report.

Partner With ZenBusiness for Professional Assistance

ZenBusiness makes the process of forming your LLC easier and simpler, so you can focus on starting and growing your business. Get your Operating Agreement template here.

To ensure your Operating Agreement covers all specific and relevant points for your company, you can also consult a legal professional before signing your Operating Agreement.