An operating agreement is important for any LLC, but for a multi-member LLC it is absolutely essential. Without one, your state's default LLC laws govern everything — and those defaults rarely match what you and your partners actually want. Think of the operating agreement as your business prenup: you hope you never need it, but you will be glad you have it.
Must-Have Sections
1. Ownership Percentages
Who owns what? This might seem obvious, but spell it out explicitly. Include each member's name, ownership percentage, and initial capital contribution. If one partner contributed $50,000 and another contributed $10,000, does that mean 83/17 ownership? Or did you agree to 50/50 regardless of contribution? Write it down.
2. Profit and Loss Distribution
Profits do not have to follow ownership percentages. You might agree that the managing partner gets 60% of profits despite owning 50%, because they handle day-to-day operations. The operating agreement should specify exactly how profits and losses are allocated.
3. Management Structure
Is the LLC member-managed (all owners vote on decisions) or manager-managed (one or more designated managers make decisions)? For LLCs with many passive investors and one active operator, manager-managed is usually better.
4. Voting Rights and Decision-Making
Which decisions require unanimous consent? Which require a simple majority? Common items requiring unanimous consent: admitting new members, selling the company, taking on significant debt, changing the operating agreement.
5. Capital Contributions
Document initial contributions and address future contributions. Can the LLC require additional capital calls? What happens if a member cannot or will not contribute additional capital when called?
6. Transfer Restrictions
Can a member sell their interest to anyone? Most operating agreements include a right of first refusal — if a member wants to sell, existing members get the first chance to buy at the same price.
7. Withdrawal and Buyout Provisions
What happens if a member wants to leave? How is their interest valued? Common methods: book value, appraised value, or a formula based on revenue multiples. Include a timeline for buyout payments.
8. Death and Disability
If a member dies or becomes permanently disabled, does their interest pass to their estate? Can the remaining members buy it out? At what price? This is often overlooked and causes enormous problems when it happens.
9. Dispute Resolution
Lawsuits between members are expensive and public. Include a mediation and/or arbitration clause to resolve disputes privately and at lower cost.
10. Dissolution Terms
Under what circumstances can the LLC be dissolved? How are assets distributed upon dissolution? This is the section nobody wants to think about, but it matters.
Common Mistakes
- Using a generic template without customization. A template from the internet does not know that you agreed to split profits 60/40 or that Partner B is contributing equipment instead of cash.
- Not addressing deadlocks. In a 50/50 LLC, what happens when the two partners disagree? Without a tie-breaking mechanism, you are stuck.
- Forgetting tax elections. Your operating agreement should specify how the LLC will be taxed and who has authority to make tax elections.
Get It Right
At Sedes, our AI generates a customized operating agreement based on your specific structure: single vs. multi-member, management type, profit distribution, and state. For multi-member LLCs with complex arrangements, we always recommend having an attorney review the final document.
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