What Should an LLC Operating Agreement Include?

An LLC operating agreement is the foundational document that governs how your limited liability company actually runs. Most states don't require one to form an LLC — but every serious LLC should have one. Without it, you're relying on your state's default LLC statutes, which were written for a generic company, not yours.

1. Member Information and Capital Contributions

The agreement should identify every member by full legal name and specify exactly what each member contributed to the company: cash, property, services, or some combination. This matters for two reasons. First, it establishes the baseline ownership record. Second, it determines what each member gets back in a dissolution — members are typically entitled to the return of their contributions before profits are distributed.

Be specific about dollar amounts and asset valuations. Vague language like "contributed services of value" creates disputes later.

2. Ownership Percentages and Membership Interests

Membership interest represents ownership in the LLC. It may or may not correspond directly to capital contributions. Some founders give sweat equity that exceeds their cash investment; others bring in investors at a different valuation. Whatever the agreement is, it must be written down explicitly.

This section should also address what happens to membership interests: can members sell them? To whom? Under what conditions? (See buy-sell provisions below.)

3. Profit and Loss Allocation

How the LLC's profits and losses are divided among members is one of the most negotiated provisions in any operating agreement. The default under most state statutes is that profits and losses follow ownership percentages — if you own 40%, you get 40% of the profits. But members can agree to any allocation they want, subject to IRS "substantial economic effect" rules for tax purposes.

Preferred returns, tiered distributions, and priority distributions are all common in investment-oriented LLCs. The key is that the allocation rules are in writing and understood by all members.

4. Voting Rights and Decision-Making

Not all decisions are made the same way. A well-drafted operating agreement distinguishes between decisions that require unanimous consent (admitting new members, amending the agreement, selling the company), decisions that require a supermajority, and day-to-day decisions that managers can make alone.

Failure to define this creates paralysis. If every decision requires a meeting and a vote, the company can't operate efficiently. If one managing member can do anything unilaterally, minority members are unprotected.

5. Management Structure: Member-Managed vs. Manager-Managed

LLCs can be structured two ways: member-managed (all owners participate in running the business) or manager-managed (designated managers — who may or may not be members — run day-to-day operations). This choice must match how you actually intend to operate and should be reflected consistently in the agreement, the articles of organization, and how you present the company to banks and counterparties.

6. Buy-Sell Provisions

What happens when a member wants to leave? Dies? Gets divorced? Goes bankrupt? Without buy-sell provisions, these events can force the company to deal with unwanted co-owners — a deceased member's estate, an ex-spouse, or a creditor who received a charging order against the membership interest.

A right of first refusal (ROFR) gives remaining members the right to purchase a departing member's interest before it can be transferred to an outsider. A buyout formula (book value, EBITDA multiple, or independent appraisal) removes the need to negotiate a price under distress. These provisions are far easier to agree on now than when someone is actually trying to leave.

7. Meetings and Record-Keeping

Even if your LLC doesn't hold formal annual meetings like a corporation, the operating agreement should specify how members communicate about company affairs, what records are kept, and how members access those records. This protects the liability shield: courts that pierce the corporate veil often cite a failure to maintain basic corporate formalities.

8. Dissolution and Winding Up

How does the LLC end? The agreement should specify what events trigger dissolution (unanimous vote, death of the sole member, expiration of a defined term), how assets are distributed on winding up, and who is responsible for filing dissolution documents with the state.

State default rules typically require paying creditors first, then returning capital contributions, then distributing remaining profits. If your members want something different, spell it out.

Why the Default Rules Aren't Enough

Most state LLC statutes were written to be a backstop — a set of rules that apply when there's no agreement. They're not designed to reflect the nuanced arrangements that members actually negotiate. A generic operating agreement is better than nothing. A properly drafted one tailored to your actual ownership structure, management style, and exit plans is far better still.