LLC Operating Agreement: What It Is and What Must Be In It

Single-member LLCs need one too

The main reason is the corporate veil. An operating agreement is documentary evidence that the LLC is a separate entity from you personally — which is the point of forming it. Banks, payment processors, and investors also routinely ask for one.

A single-member agreement is short: ownership, management authority, capital contributions, how distributions are taken, and what happens on death or incapacity. Fifteen minutes of work that protects the liability shield you paid to create.

Ownership and capital contributions

• State each member's ownership percentage and what they contributed for it — cash, property, services, or IP.
• Distinguish contributed capital from loans to the company; the tax treatment differs sharply.
• Decide whether additional capital calls are permitted, and what happens to a member who cannot meet one (dilution is the usual answer).
• Address whether services count as contribution, and if so, on what vesting schedule.

Management: member-managed or manager-managed

Member-managed means every member can bind the company. That is fine for two aligned founders and dangerous for a passive-investor structure.

Manager-managed concentrates authority in named managers, with a reserved list of decisions requiring member approval: taking on debt above a threshold, selling assets, admitting new members, amending the agreement.

Write the reserved-matters list explicitly with dollar thresholds. "Material decisions" is not a threshold.

Distributions and tax allocations

Separate two things that are often conflated: allocation of profit and loss for tax purposes, and actual cash distributions.

Members are taxed on allocated profit whether or not cash was distributed. A tax-distribution clause — requiring the company to distribute at least enough for members to pay tax on their allocated share — prevents the classic phantom-income problem.

Exit, deadlock, and buy-sell

This is the section nobody wants to write and everybody needs. Cover voluntary withdrawal, involuntary events (death, disability, bankruptcy, divorce), and forced sale.

A right of first refusal keeps membership interests from landing with strangers. A valuation method — fixed formula, agreed multiple, or independent appraisal — prevents a fight over price. For 50/50 companies, add a deadlock mechanism such as a shotgun clause or a named mediator.

State-specific points to check

• California LLCs pay an annual minimum franchise tax plus a gross-receipts fee above set thresholds.
• New York imposes a newspaper publication requirement on new LLCs within 120 days of formation.
• Texas LLCs file a public information report and pay franchise tax above the no-tax-due threshold.
• Delaware's appeal is its Chancery Court case law, which matters most for outside-investor structures.