LLC operating agreement
IN PLAIN ENGLISH

Recites the basic facts: the LLC's name, state of formation, principal place of business, and the purpose for which it was formed. The purpose is usually broad ("any lawful business activity") to give the company flexibility.

A list of who owns the company and what percentage each member holds. Ownership is typically expressed as membership units or percentage interests. This section may also describe different classes of membership (e.g., Class A with voting rights, Class B without) and the capital each member contributed.

What each member has put into the company — cash, property, services — and whether additional contributions are required in the future. Some agreements allow or require capital calls (mandatory additional investments); others don't. If capital calls are allowed, understand whether failure to contribute can dilute your ownership or trigger forfeiture.

How the company's taxable income and losses are allocated among members. The default is pro rata (based on ownership percentage), but operating agreements can create special allocations — for example, giving early investors a preferred return before profits are split. Allocations must comply with IRS partnership tax rules to be respected.

When and how cash is distributed to members. Distributions are different from allocations: you can be allocated income (and owe taxes) without receiving any cash. The operating agreement typically gives the manager or managing members discretion over distributions, subject to maintaining adequate reserves. Some agreements require distributions at least sufficient to cover members' tax liabilities on allocated income ("tax distributions").

Whether the LLC is "member-managed" (all members participate in running the business) or "manager-managed" (one or more designated managers make decisions, while other members are passive investors). In a manager-managed LLC, the agreement defines the manager's authority, compensation, and how they can be removed.

How decisions are made: which matters require a simple majority, which require a supermajority (e.g., 67% or 75%), and which require unanimous consent. Common supermajority or unanimous matters include selling the company, admitting new members, amending the operating agreement, taking on significant debt, and removing a manager. Voting can be per capita (one member, one vote) or based on ownership percentage.

Procedures for holding member meetings, providing notice, and documenting decisions. Many small LLCs operate informally without formal meetings, but the operating agreement should still provide a mechanism for calling a vote when needed.

Whether and how members can sell or transfer their ownership. Most operating agreements restrict transfers: you can't sell to an outsider without the consent of other members, and even permitted transfers may be subject to a right of first refusal (ROFR), where existing members can buy the interest at the offered price before it goes to a third party.

What happens when a member wants to leave or is forced out. A buyout clause sets the process and valuation method (book value, fair market value, formula, appraisal). Some agreements include a "put" right (a member can force the company to buy their interest) or a "call" right (the company can force a member to sell). These provisions matter enormously when a founder departs.

Drag-along gives majority members the right to force minority members to sell their interests in a company-wide sale. Tag-along gives minority members the right to participate in a sale on the same terms as the majority. Both are standard in venture-backed and private-equity-backed LLCs.

Restrictions on members competing with the company or soliciting its employees and customers. These clauses may apply during membership and for a period after departure. Enforceability depends on state law and reasonableness.

Whether members and managers owe fiduciary duties (loyalty, care, good faith) to each other and the company. Delaware and some other states allow operating agreements to limit or eliminate fiduciary duties — a provision that favors managers and controlling members. Read this section carefully.

What triggers dissolution of the LLC (vote, bankruptcy, death of a member, court order) and how the business is wound up — paying creditors, distributing remaining assets, and terminating the entity. Most operating agreements try to avoid involuntary dissolution by providing buyout mechanisms instead.

A promise by the company to defend and pay for claims against members and managers arising from their service to the LLC, except for willful misconduct or fraud. Indemnification protects members who act in good faith from personal liability.

How the operating agreement can be changed. Amendments typically require a supermajority or unanimous vote. Some provisions (like voting thresholds) may be locked and unamendable without affected members' consent.