What Should a Multi-Member LLC Operating Agreement Cover?

If your LLC has more than one member and no written operating agreement, your state’s default statute is your operating agreement, and it was not written with your business in mind. The LLC operating agreement is the document that decides who owns what, who decides what, how money comes out, and what happens when a member wants to leave, dies, divorces, or stops showing up. Most member disputes we see trace back to a question the agreement never answered. Below is what a multi-member agreement should settle, section by section.

Why the default rules are not good enough

Every state’s LLC act fills gaps with default rules, and those defaults vary. Some states split profits per member regardless of capital contributed. Others split by contribution. Some let any member bind the company to a contract. Some require unanimous consent to admit a new member, which can freeze a company when one founder goes quiet. New York goes further and expects every LLC to adopt a written operating agreement, although it does not dissolve the company for failing to do so.

The agreement also matters for liability protection. Courts and banks look for evidence that the LLC is a real, separately governed entity. A signed operating agreement, followed in practice, is the first thing they ask for. Our business formation and structuring practice drafts these agreements alongside the articles, because the two documents should be designed together.

Ownership, capital, and how profits are allocated

Start with what each member contributes: cash, property, intellectual property, or services, and what it is worth. Then state each member’s percentage interest or number of units. These two numbers do not have to match. A member who contributes most of the cash may hold a smaller share if another member is contributing years of work, but the agreement has to say so explicitly or the tax allocations will not hold up.

Then address what happens when the company needs more money. Can the managers call for additional capital? What happens to a member who does not pay: dilution, a loan from the other members at a stated rate, or forfeiture? Members rarely want to think about this at signing, which is exactly why it belongs in the document.

Distributions deserve their own clause. Allocation of profit for tax purposes and actual cash distributions are different things, and members in a pass-through entity owe tax on allocated profit whether or not cash is distributed. A tax distribution clause, which requires the company to distribute at least enough to cover each member’s estimated tax, prevents a very common resentment. If founders are receiving equity for work rather than cash, see our post on how co-founders should split equity and set vesting, because profits interests in an LLC have their own mechanics.

Management and voting

Decide whether the LLC is member-managed or manager-managed. In a member-managed company every member has authority to act for the company. In a manager-managed company, one or more managers run day-to-day operations and members vote only on reserved matters. Once there are more than two or three members, or any passive investors, manager-managed is usually the right structure.

The reserved matters list is where you protect yourself. Typical items that require a supermajority or unanimous vote:

• Admitting a new member or issuing new units
• Selling the company or substantially all of its assets
• Borrowing or guaranteeing debt above a stated amount
• Amending the operating agreement or changing the business purpose
• Related-party transactions with a member or manager

For two-member companies at 50/50, add a deadlock mechanism. Options range from a neutral tiebreaker and mediation to a buy-sell trigger where one member names a price and the other chooses to buy or sell at it. Without one, a 50/50 deadlock ends in a court-ordered dissolution or a stalemate that starves the business. Ongoing board procedures and policies are a separate layer; CLP’s corporate governance and internal policies team builds those once the company is running.

Transfers, exits, and buyouts

Membership interests should not be freely transferable. Most agreements prohibit transfers without consent and then carve out limited exceptions, such as transfers to a family trust. Pair that with a right of first refusal, so remaining members can match any outside offer, and consider tag-along and drag-along rights if an eventual sale of the whole company is likely.

Then plan for involuntary exits. The agreement should say what happens on a member’s death, disability, bankruptcy, or divorce, and whether the company or the other members have the right (or the obligation) to buy the interest. Specify the valuation method: an agreed value updated annually, a formula tied to revenue or earnings, or an independent appraisal. Specify payment terms, because few small companies can pay a full buyout in cash on the day it is triggered. A promissory note over several years with security is common.

Restrictive covenants belong here too. A departing member who can immediately open a competing shop across the street is a problem the agreement should address, within the limits state law places on noncompetes.

Dissolution, disputes, and housekeeping

List the events that dissolve the company and the order in which assets are distributed on winding up. Add a dispute resolution clause: negotiation between principals first, then mediation, then arbitration or litigation in a named venue. Include indemnification for managers acting in good faith, a confidentiality obligation that survives departure, and a clear amendment procedure.

Finally, sign it and keep it current. An unsigned draft in a shared folder is worth very little. When members change, when capital comes in, or when the business pivots, amend the agreement rather than relying on an email thread. If you are still deciding on entity type, our post on whether your startup should be an LLC or a corporation comes first, and the filing paperwork is covered in documents required to set up a company in America. For agreements with outside parties rather than among members, see our contract drafting and negotiation practice.

If your LLC is running on a template agreement or none at all, Capitol Law Partners can draft or revise an operating agreement that matches how your members actually work together. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our LLC formation and operating agreement page or schedule a consultation.