What Goes in an Operating Agreement and Why It Matters

An operating agreement is the blueprint for how your LLC will function. While Louisiana doesn't legally require LLCs to have an operating agreement, creating one is among the most important steps you can take to protect your business and prevent future conflicts. This comprehensive guide explains what belongs in your operating agreement and why each element matters for your LLC's success.

Why Every LLC Needs an Operating Agreement

Even if your state doesn't require it, an operating agreement serves as crucial protection for your business. Without this document, your LLC will be governed by default state laws, which may not align with your business goals or member preferences. An operating agreement provides clarity, prevents disputes, and demonstrates to courts and creditors that your LLC is a legitimate business entity separate from its owners.

Key Benefits:

• Establishes clear rules for business operations

• Protects your limited liability status

• Prevents costly disputes between members

• Provides flexibility in management and profit distribution

• Supports your business's credibility with lenders and investors

Essential Components of an Operating Agreement

Company Information and Formation Details

Start your operating agreement with basic information about your LLC. This section should include the company name, principal address, date of formation, and the state where you filed your Articles of Organization. Include your registered agent information and specify the LLC's purpose and duration.

Member Information and Ownership Structure

Clearly identify all LLC members and their ownership percentages. Detail each member's initial contribution, whether in cash, property, or services, and specify the value of these contributions. Include provisions for how ownership interests can be transferred and any restrictions on transfers to outside parties.

Important Elements:

• Member names and addresses

• Ownership percentages and capital contributions

• Classes of membership (if applicable)

• Voting rights and responsibilities

• Restrictions on membership transfers

Management Structure

Define whether your LLC will be member-managed or manager-managed. In member-managed LLCs, all members participate in daily operations and decision-making. Manager-managed LLCs designate specific individuals to handle operations while other members act as passive investors.

Member-Managed Structure:

• All members have authority to bind the LLC

• Decisions made by majority vote unless specified otherwise

• Each member has management responsibilities

Manager-Managed Structure:

• Designated managers handle daily operations

• Members vote on major decisions but don't manage daily activities

• Clear distinction between managing and non-managing members

Decision-Making Procedures

Establish voting procedures for different types of decisions. Specify which decisions require unanimous consent, majority vote, or super-majority approval. Common decisions requiring member approval include admitting new members, amending the operating agreement, selling major assets, or dissolving the LLC.

Decision Categories:

• Routine operational decisions

• Major business decisions requiring member approval

• Decisions requiring unanimous consent

• Emergency decision-making procedures

Profit and Loss Distribution

Detail how profits and losses will be allocated among members. While distributions often align with ownership percentages, your operating agreement can establish different allocation methods. Address when distributions will be made, whether they're guaranteed, and the process for determining distribution amounts.

Distribution Considerations:

• Profit and loss allocation percentages

• Frequency of distributions

• Tax allocation procedures

• Retained earnings policies

Capital Contributions and Additional Funding

Specify initial capital contributions from each member and procedures for additional funding needs. Address whether members are required to contribute additional capital, how additional contributions affect ownership percentages, and consequences for failing to meet contribution requirements.

Member Withdrawal and Expulsion

Create clear procedures for members who want to leave the LLC or must be removed. Include triggering events for involuntary withdrawal, such as bankruptcy, death, or breach of agreement. Specify valuation methods for departing members' interests and payment terms for buyouts.

Withdrawal Provisions:

• Voluntary withdrawal procedures

• Involuntary withdrawal triggers

• Valuation methods for member interests

• Payment terms and timeline

• Non-compete and confidentiality requirements

Dissolution and Winding Up

Outline circumstances that would trigger LLC dissolution and the process for winding up business affairs. Address how assets will be distributed, debts will be paid, and remaining responsibilities will be handled. Include provisions for members who want to continue the business after dissolution triggers occur.

Basic Operating Agreement Outline

Use this outline as a starting point for your LLC's operating agreement:

Article I: Formation and Organization

• Company name and address

• Formation date and state

• Registered agent information

• Purpose and duration

Article II: Members and Ownership

• Member identification and addresses

• Initial capital contributions

• Ownership percentages

• Membership certificates (if used)

Article III: Management and Operations

• Management structure (member-managed or manager-managed)

• Authority and responsibilities

• Decision-making procedures

• Meeting requirements

Article IV: Financial Provisions

• Capital accounts and contributions

• Profit and loss allocation

• Distribution procedures

• Tax elections and responsibilities

Article V: Membership Changes

• Transfer restrictions

• Admission of new members

• Withdrawal procedures

• Valuation and buyout provisions

Article VI: Dissolution and Winding Up

• Dissolution triggers

• Winding up procedures

• Asset distribution

• Final tax returns and filings

Article VII: General Provisions

• Amendment procedures

• Dispute resolution

• Governing law

• Signature requirements

Industry-Specific Considerations

Different types of businesses may require additional provisions in their operating agreements. Professional service LLCs might need clauses addressing licensing requirements and professional liability. Real estate LLCs often include specific provisions for property management and capital calls. Technology companies may require detailed intellectual property provisions and confidentiality agreements.

Tax Elections and Implications

Your operating agreement should address important tax elections, such as choosing S-Corp taxation or establishing specific allocation methods. Include provisions for tax distributions to help members pay taxes on allocated income, and specify responsibilities for tax return preparation and filing.

Common Mistakes to Avoid

Vague Language: Use clear, specific language that leaves no room for interpretation. Ambiguous terms often lead to disputes and costly legal battles.

Ignoring State Law: Ensure your operating agreement complies with Louisiana LLC law and doesn't contradict mandatory state provisions.

Inadequate Buyout Provisions: Failing to establish clear valuation methods and payment terms for departing members creates significant problems when ownership changes occur.

No Dispute Resolution: Include mediation or arbitration clauses to resolve conflicts without expensive litigation.

Outdated Provisions: Regularly review and update your operating agreement as your business grows and circumstances change.

When to Update Your Operating Agreement

Your operating agreement isn't a "set it and forget it" document. Review and potentially update it when adding or removing members, changing business operations, modifying profit-sharing arrangements, or when legal requirements change. Regular reviews ensure your agreement continues to serve your business's needs effectively.

Professional Help

While simple LLCs can use basic operating agreement templates, most businesses benefit from professional guidance. An experienced business attorney can customize your agreement to address your specific situation, industry requirements, and growth plans. The cost of professional preparation is minimal compared to the potential costs of disputes or legal problems caused by inadequate agreements.

A well-crafted operating agreement is one of the most valuable investments you can make in your LLC. It provides the foundation for smooth operations, protects your business interests, and helps prevent costly conflicts that could threaten your company's success. Take the time to create a comprehensive agreement that serves your business's unique needs and protects all members' interests.