Top 10 Operating Agreement Clauses to Consider

1. Ownership Percentages and Capital Contributions

State clearly what each member contributed, cash, property, or services, and what ownership percentage that contribution buys. This is the foundation every other clause builds on, including profit allocation and voting weight.

2. Management Structure

Specify whether the LLC is member-managed, where all members participate directly in decisions, or manager-managed, where one or more designated managers run day-to-day operations on the members' behalf. This affects who has authority to sign contracts and bind the LLC.

3. Voting Rights and Decision-Making Thresholds

Define what vote is required for different types of decisions: routine matters might need only a simple majority, while major decisions, such as admitting a new member, taking on significant debt, or selling a major asset, often require a higher threshold or unanimous consent.

4. Profit and Loss Allocation

Specify how profits and losses are allocated among members. This often mirrors ownership percentage, but an operating agreement can allocate differently if the members agree, subject to IRS rules on substantial economic effect; state the method clearly rather than assuming it matches ownership automatically.

5. Distributions

Separate from profit allocation for tax purposes, a distributions clause addresses when and how actual cash gets paid out to members, such as on a set schedule, when the LLC reaches a certain cash reserve, or only by a vote of the members. Without this, members can disagree about whether profit should be paid out or kept in the business.

6. Admission of New Members

Set the approval process for admitting a new member, commonly unanimous consent of existing members, and address how a new member's contribution affects existing members' ownership percentages.

7. Transfer Restrictions

Address whether a member can sell, gift, or will their membership interest to someone outside the LLC, and whether existing members get a right of first refusal to buy it first. Without this clause, state default rules on transferring an interest apply, which may allow an outcome the other members never intended, such as a member's interest passing to an heir who has no relationship with the business.

8. Buyout, Withdrawal, and Dissociation Provisions

Describe how a member can voluntarily leave, what triggers an involuntary removal, and how the departing member's interest is valued and paid out. This is one of the most consequential clauses to have in place before any dispute arises, since negotiating these terms after a falling-out is far harder than agreeing on them in advance.

9. Dissolution and Winding-Up Procedures

Set out what triggers dissolving the LLC, such as a unanimous vote or a specific event, and how remaining assets are distributed among members after debts are paid. This avoids ambiguity if the business eventually winds down.

10. Dispute Resolution

Consider a clause requiring mediation or arbitration before members can sue each other or the LLC directly. This can resolve disagreements faster and more privately than litigation, and some members find it helps preserve working relationships even through a significant disagreement.

A Missing Clause Defaults to State Law, Not to What Members Intended

Any topic your operating agreement doesn't address is filled in by your state's default LLC statute, applied the same way to every LLC regardless of what your specific members would have wanted. This is the core reason to address these ten areas explicitly rather than leaving them to chance.

Simpler Businesses Don't Need Every Clause in Full Detail

A single-member LLC, for example, doesn't need an elaborate voting-rights clause, since there's only one member. Tailor the depth of each clause to your LLC's actual situation rather than treating every topic as equally urgent for every business.

Revisit the Agreement When Circumstances Change

An operating agreement drafted at formation may not fit the business once it adds members, changes its management structure, or grows significantly. Review it periodically and amend it when a major change happens, rather than relying on a document that no longer matches how the LLC actually operates.

This Isn't a Substitute for Legal Advice

A template covers common situations, but an LLC with multiple owners, unequal contributions, or complex succession plans benefits from a business attorney's review. This isn't legal advice; talk to a business attorney before finalizing an agreement for an LLC with more than a straightforward, single-owner structure.