How to Write an LLC Operating Agreement That Works

Every successful business needs a clear framework for ownership, decision-making, and dispute resolution. For LLCs, this means having a well-crafted operating agreement, a document that defines how your company will run and protects both the business and its owners.

Whether you’re starting an LLC in Colorado, Kansas, Missouri, or beyond, this post outlines the key provisions to include in your agreement so you can avoid future headaches and set up your business for success. Learn where to incorporate your LLC here.

Define Ownership and Member Roles

Your LLC operating agreement should clearly list all owners (members) and their ownership interests. Whether ownership is divided into membership interests or units, define whether they are voting or non-voting units and outline any special rights attached to them.

How to Add or Remove Members

What happens if you want to bring in a new owner or if an existing member wants to leave? Your agreement should spell out:

• The process for admitting new members
• Rules for voluntary withdrawals
• What happens if a member becomes incapacitated or passes away

Member Contributions

Outline what each member is bringing to the business. Contributions can be cash, property, services, or a combination, and documenting these properly helps prevent disputes over ownership stakes later on.

Equity Splits and Ownership Transfers

Disagreements over equity and ownership transfers are a common source of business conflict. To avoid problems, define:

• How equity is allocated based on contributions and responsibilities
• Whether members can sell or transfer their shares without approval
• Rights such as right of first refusal, drag-along, and tag-along rights

Decision-Making and Voting Rights

Not all business decisions are equal. Your agreement should clarify:

• What decisions require a simple majority vs. supermajority vs. unanimous approval
• If voting rights are based on ownership percentage or equal votes per member

Management Structure (Who’s in Charge?)

LLCs can be member-managed (where all members participate in operations) or manager-managed (where only certain managers handle operations). Even in a manager-managed LLC, define any limits on their authority to protect the members.

Intellectual Property Ownership

If members create intellectual property (IP) for the business, does the LLC own it? Clarify IP ownership to avoid future disputes, especially if IP is tied to member contributions or licensing agreements. Learn more about copyrights, trademarks, and patents.

Confidentiality and Business Restrictions

Your agreement should include confidentiality clauses preventing members from sharing company secrets. You may also want to restrict members from joining competing businesses while they are part of your LLC. Get three free NDA templates!

LLC Tax Treatment Options

LLCs have tax flexibility. They can be taxed as sole proprietorships, partnerships, corporations, or s-corporations. Choose and document the structure that fits your business needs. Learn more about business taxes.

Guaranteed Payments for Members

Some LLCs provide guaranteed payments to members (similar to a salary) before profits are split. If you want certain members to receive a steady income, define the terms in your agreement.

Profits and Distributions

Clearly define how and when profits and tax distributions will be handled. Many LLCs choose to make profit distributions optional but ensure tax distributions are mandatory so members can cover their tax obligations.

Your Operating Agreement is Your Business Safety Net

A well-structured LLC operating agreement prevents disputes, protects members, and provides clarity as your business grows. The more details you include upfront, the fewer conflicts you’ll face later on.

*This article is general in nature and is not legal advice.