LLC Operating Agreements: Key Considerations for New Business Owners

New business owners reviewing an LLC operating agreement with a legal advisor
When you start an LLC, it’s easy to focus on branding, clients, and your product—but without a proper operating agreement, you’re risking unnecessary conflict down the line. Even in states where it’s not required, this document is your safeguard. It lays out how your business will run, who makes decisions, and how money flows in and out. Whether you’re a solo entrepreneur or working with partners, your operating agreement defines your authority, protects your interests, and keeps everything clean and enforceable. This guide walks you through what you need to cover, why each part matters, and how to make sure your agreement fits your business from day one.

Ownership and Member Roles

You need to spell out who owns what. The operating agreement should list every member, their ownership percentage, and their initial capital contributions. Whether each person brought in cash, equipment, or intellectual property, it needs to be recorded clearly. This not only avoids disputes but gives clarity on voting rights and profit distribution later on.

Don’t stop at ownership percentages—outline what each member is expected to do. Are they actively managing the business, or are they passive investors? You can define roles so no one is left guessing. It also helps if you ever need to remove or replace a member. If there’s no clear language, things can get personal—and messy.

Management Structure and Decision-Making Authority

LLCs can be member-managed or manager-managed. If you and your partners want to be involved in the day-to-day, member-managed works. But if you want to appoint someone to run operations—whether it’s one of you or a hired manager—you’ll need to set up a manager-managed structure. This distinction needs to be in the agreement so there’s no confusion about who has the authority to sign contracts, approve expenses, or make staffing decisions.

You should also outline how decisions will be made. Will major moves like buying property or taking on investors require unanimous consent, or just a majority? If you don’t define this, state default rules apply, and they might not match your expectations.

Profit Distribution and Tax Matters

Profits don’t have to be split evenly. Your agreement should state exactly how profits and losses will be allocated. Often this mirrors ownership percentages, but not always—especially if someone is contributing sweat equity or taking on more risk. You can also stagger distributions or prioritize repayment to specific members.

Make sure to also address tax distributions. LLCs are pass-through entities, so members pay taxes on their share of profits, even if they didn’t receive a cash payout. A smart operating agreement includes a clause to ensure members receive enough to cover their tax bills. This avoids resentment or cash flow issues at tax time.

Capital Contributions and Future Funding

Document what each member has contributed at the start—cash, property, services, or time. Also, consider what happens when the business needs more funding. Will you require members to contribute more, or allow outside capital? Can someone’s share be diluted if they don’t participate in future funding?

This is an area many businesses ignore until it’s too late. Set clear expectations about funding so no one feels blindsided if the business hits a cash crunch or wants to expand aggressively.

Membership Changes and Exit Planning

At some point, someone will want to leave, retire, sell their interest, or bring in someone new. If you don’t prepare for this, you risk losing control of your business. Your agreement should include a buy-sell clause that outlines what happens when a member exits. Do other members get the right to buy that share first? How is the price calculated? Is there a payment schedule?

You also want to cover involuntary events—like death, bankruptcy, or legal separation. If a member’s interest ends up with a family member or creditor, that could introduce someone who doesn’t belong in your business. Protect against that by stating exactly who can become a member and under what conditions.

Voting Rights and Operational Rules

Not all LLCs operate on one-member-one-vote. Voting power can be tied to ownership percentage or another agreed structure. Spell it out. Will day-to-day decisions require a simple majority? Are there specific items—like mergers, selling the company, or bringing in investors—that require unanimous approval?

Also, consider creating rules around meetings. Will you meet quarterly or only when needed? Do votes require written consent or can they happen electronically? These details might seem minor, but they’ll save you time when real decisions need to be made.

Dispute Resolution and Legal Clauses

No one wants to think about lawsuits or disputes, but it’s best to prepare. Include a section on how disputes will be handled. Will you use mediation, arbitration, or go straight to court? Where will disputes be resolved? Who pays legal fees?

You should also include standard legal clauses—like indemnification of managers, limitations on liability, and governing law. These protect the business and its decision-makers from unintended fallout when things go wrong.

What Should New Business Owners Include in an LLC Operating Agreement?

  • Ownership percentages and capital contributions
  • Management structure and decision-making rules
  • Profit and tax distribution policies
  • Buy-sell and exit terms
  • Voting rights and meeting guidelines
  • Dispute resolution procedures
  • Governing law and legal protections

In Conclusion

An LLC operating agreement isn’t just a formality—it’s your business’s internal constitution. It defines ownership, protects relationships, clarifies roles, and sets rules for handling money, conflict, and change. Without it, you’re relying on default laws that may not fit your goals. As a new business owner, investing the time to create a tailored agreement gives you control, security, and peace of mind. It’s not about anticipating every scenario—it’s about being ready for the ones that matter most.

For more insights on LLCs, ownership strategies, and legal protections for entrepreneurs, follow John Pauciulo on X.

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