In two recent decisions, the New York Appellate Division held that a limited liability company (“LLC”) that does not sign its own operating agreement is not bound by the terms of that agreement; only its signatory members are bound. This holding opens the door to the unwelcome dynamic where LLC members may be bound to the bargained for rights and obligations by which they intended to govern the LLC, but the LLC is not.

The operating agreement of an LLC is generally accepted as the foundational document of any LLC, providing for how the company will be governed as well as the rights and obligations of each of its members. The operating agreement is meant to supersede the default rules and obligations set forth in the New York Limited Liability Act (the “LLC Law”). However, the First Department, in Wythe Berry LLC v. Goldman, 230 A.D.3d 1081 (1st Dep’t 2024) and in its subsequent recent decision Gurney-Goldman v. Sol Goldman Investments LLC, 2025 NY Slip Op 00722 (1st Dep’t Feb. 6, 2025), held that, unless the company signs its own operating agreement, it is not bound by that agreement.

The pertinent facts of both cases are simple. Wythe Berry involved the breakdown of the business relationship between members concerning the development of a hotel. After one LLC member commenced an arbitration against the LLC under the terms of the operating agreement, the LLC commenced a proceeding to stay the arbitration. The First Department, reversing the trial court’s denial of the petition to stay, held that, because the LLC was not a signatory to the operating agreement, it was not bound by the arbitration clause. Similarly, in Gurney-Goldman, certain LLC members commenced a claim against the LLC for breach of contract for failing to discharge its obligations under the operating agreement. Relying on Wythe Berry, the First Department held that the LLC members’ cause of action for breach of contract against the LLC was properly dismissed because the LLC had not executed its own operating agreement.

The Court in both cases relied on the fact that the LLC Law is silent on this issue. Particularly, Section 417 of the LLC Law provides that “the members of a[n] [LLC] shall adopt a written operating agreement that contains any provisions … relating to (i) the business, (ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents.” In addition, Section 203(d) of the LLC Law states that “a[n] [LLC] formed under [the LLC Law] shall be a separate legal entity.” Thus, according to the First Department, the requirement in Section 417 of the LLC Law that requires the “members of a[n] LLC” to adopt an operating agreement means that only the members of the LLC, and not the LLC itself, are required to adopt the operating agreement.

The holdings in Gurney-Goldman and Wythe Berry, however, give rise to a scenario where the members of a non-signatory LLC are bound by different obligations than the LLC itself, creating the potential for inefficient and inconsistent outcomes. For example, an operating agreement may displace the default voting rights of members in managing the affairs of the LLC and, thus, the default rules and the operating agreement provisions may need to be met before an LLC may act.  In addition, disputes may need to be resolved in multiple forums. For example, in Wythe Berry, where the operating agreement contained an arbitration clause agreed to by all members, but not the LLC, the members will be subject to arbitration, while disputes with the LLC—even if involving the same facts, circumstances, and claims—would have to be litigated in court. Not only is this result inefficient and contrary to the principle of judicial economy, but also is likely to create inconsistent outcomes.

To avoid the result in Wythe Berry and Gurney-Goldman, 20 states, including California and Florida, have adopted the Revised Uniform Limited Liability Company Act (the “Revised LLC Act”), a model law meant to harmonize and clarify the law governing LLCs. The Revised LLC Act provides that an LLC is bound by its operating agreement regardless of whether it has “manifested assent to the operating agreement.”  In Delaware, which has not adopted the Revised LLC Act, the LLC law specifies that, while an LLC is not required to execute its operating agreement, it is “bound” regardless of whether it executes it.

There is nothing in Wythe Berry and Gurney-Goldman to suggest that this issue is limited to LLCs and their members. Indeed, under the New York Limited Liability Partnership Act, a limited liability partnership (“LLP”) is not required to adopt articles of association to regulate the relationship between its partners and the LLP is similarly considered a separate legal entity. Thus, these decisions are likely to have a far-reaching effect, and it would not be surprising if the decisions were reviewed by the Court of Appeals. In the interim, LLCs and LLPs should carefully review their governing documents to ensure that the entity is a signatory of those agreements.

*This article was also written by Linus Liu.