Whether your limited liability company, or LLC, needs a nondisclosure agreement depends on the type of business you are operating. If your business requires the use of confidential information or trade secrets not known to the public, it may be prudent to require LLC members and employees to sign a nondisclosure agreement to safeguard the confidentiality of the information. No law requires an LLC to use a nondisclosure agreement; although a few states require an LLC to adopt an operating agreement specifying how the LLC will be run. An operating agreement can include a nondisclosure provision.

Nondisclosure Agreement Basics

The primary use of a nondisclosure agreement is to protect information related to a company's operations, such as client lists, financial records, formulas or procedures. This information is generally regarded as a company's trade secrets and constitutes the basis for its competitive advantage in the marketplace. Because this information is necessarily disclosed to company personnel -- owners, officers and employees -- as part of business operations, a nondisclosure agreement may be necessary to protect the company from having its trade secrets disclosed to its competitors or the general public. For example, a nondisclosure agreement will typically give the company the right to penalties (e.g., money judgment or court injunction) against a former employee who disclosing trade secrets learned during his employment.

LLC Operating Agreements

An important document commonly used by LLCs is an operating agreement. The purpose of this agreement is to set forth the rules and guidelines for the relationship between the LLC and owners -- called members -- as well as the relationship among the owners. An operating agreement will typically include provisions regarding the members' voting rights, a member's duties to the LLC and each other, and how the company will be managed. Despite the importance of a written operating agreement to an LLC, New York and Missouri are the only states that, as of publication, require every LLC to have an operating agreement.

Operating Agreement With A Nondisclosure Provision

In appropriate situations, an LLC's operating agreement can include a nondisclosure provision that would require each of the LLC members to maintain the confidentiality of the LLC's trade secrets. Such a provision is useful in conjunction with a buyout provision to prevent a member who terminates his membership in the LLC from competing against the LLC. To be enforceable, the nondisclosure provision must include a time period that limits the duration of the member's nondisclosure obligation, which, in most cases, is limited to five years.

Nondisclosure Agreements With Non-Member Employees and Others

A nondisclosure provision in an operating agreement will only be enforceable against the members of an LLC. To protect an LLC's trade secrets from disclosure by non-member employees, the LLC must prepare a separate nondisclosure agreement for each employee who has access to the trade secrets. For situations that involve contracts with other companies, such as a contract between the LLC and the manufacturer of its products, the LLC may have to sign a nondisclosure agreement that is mutual and protects not only the LLC's trade secrets but the other company's trade secrets as well.

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