Operating Agreement essentials: what should actually be in yours
Most state-provided templates are fine until they are not. Here are the eight clauses that come up when an LLC has a dispute · and how to write each one.
A state-provided LLC template is fine when everything works. When there is a disagreement about who owns what, who can sign what, or what happens when a member leaves, the operating agreement is what gets pulled out and read out loud. Eight clauses come up the most. Each one has a default that the state imposes if you do not address it, and that default is often not what either side wanted.
1. Membership interests and capital contributions
This clause specifies what each member contributed (cash, property, services, "sweat equity") and what percentage of the LLC they own as a result. Be explicit. "Member A contributed $50,000 in cash and owns 50%. Member B contributed services valued at $50,000 and owns 50%" is much better than "the members are equal partners."
If members will make additional contributions later, specify the mechanism. Pro-rata mandatory contributions? Voluntary with dilution? Loans instead of equity? Each option leads to a different ownership trajectory.
2. Distribution waterfall
When the LLC has profits to distribute, in what order do they go out? The default in most states is "pro-rata by ownership percentage." If that is what you want, fine. If anyone is entitled to a "preferred return" (their capital back first, plus a hurdle rate before pro-rata distributions begin), that needs to be written.
This is the clause that gets fought over in real estate LLCs, fund-of-fund structures, and any LLC where one member is contributing capital and another is contributing operational work.
3. Management structure
Two options exist. Member-managed: all members have authority to make decisions and sign contracts on behalf of the LLC. Manager-managed: one or more designated managers have authority; non-manager members are passive investors with no operational role.
Member-managed is the default for LLCs with few owners who all work in the business. Manager-managed is appropriate when you have passive investors who should not be signing contracts.
4. Voting rights
What decisions require a vote, and what percentage approval? Standard categories:
Day-to-day decisions: managing member or majority. Material business decisions (taking on debt above a threshold, hiring senior employees, signing contracts above a dollar amount): supermajority (66% or 75%). Fundamental decisions (adding new members, selling the company, dissolving): unanimous or 90%+.
The state default is usually majority by ownership percentage for everything, which means a 51% owner can outvote a 49% owner on every single decision. Most multi-member LLCs want more nuance than that.
5. Transfer restrictions
Without a transfer restriction clause, any member can sell or assign their interest to a third party. Including someone you do not want to work with. Standard transfer restrictions include a right of first refusal (existing members get the right to buy out a departing member at the same terms a third party offered) and an outright prohibition on transfers without the consent of other members.
This clause is one of the most frequently cited reasons why a state-provided template is insufficient for a multi-member LLC.
6. Buy-sell provisions
What happens when a member leaves voluntarily, becomes disabled, dies, or is forced out? The buy-sell provision specifies who buys their interest, at what price, and on what terms. A common structure: the LLC has the first option to redeem the interest at a formula price (book value, multiple of earnings, or appraised value); if the LLC does not exercise, remaining members have a pro-rata option to purchase.
Without this clause, a deceased member's interest may pass to their heirs, who can become full members of the LLC by inheritance. Many founders do not realize this until they are negotiating with a member's estate.
7. Indemnification
When a member or manager is sued for actions taken in their official capacity, does the LLC reimburse their legal costs? In what circumstances? Standard language indemnifies for good-faith acts within the scope of authority, excluding willful misconduct or gross negligence. Without this clause, members may be personally on the hook for defending themselves in business-related litigation.
8. Dissolution
How does the LLC end? Standard triggers: vote of members above a specified threshold, expiration of a specified term, judicial dissolution. After dissolution, how are remaining assets distributed? Standard order: pay debts, return capital contributions, distribute remaining assets per ownership percentages.
Pay attention to whether a single member can force dissolution by triggering a deadlock. In two-member LLCs with 50/50 ownership, this is the clause that becomes weaponized when one member wants out and the other wants to keep operating.
Single-member LLCs: simpler, but still worth one
If you are the only member, most of the above clauses do not apply. But you still want an operating agreement, for a different reason: piercing the corporate veil. Without an operating agreement, courts and creditors have an easier time arguing that a single-member LLC is just an alter ego of the owner and therefore the owner is personally liable for LLC debts.
A short single-member operating agreement (3-5 pages) that documents the LLC's separation from your personal affairs, your capital contribution, your role as manager, and the standard operational provisions provides meaningful protection at almost no cost to draft.
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