What Your LLC Operating Agreement Is Probably Missing

Most LLC owners have an operating agreement. Very few have a good one.

The typical story goes like this: you formed your LLC through an online service, a state filing portal, or a generalist attorney who handled the formation quickly and cheaply. You got a document. It said “operating agreement” at the top. You signed it, filed it somewhere, and moved on to actually building your business.

That document is almost certainly missing provisions that will matter, sometimes a great deal, the moment something goes wrong between you and a co-owner, or between you and the state, or between you and your own future plans.

Here is what tends to be missing, and why each gap is a real risk.

The Deadlock Problem

If your LLC has two members with equal ownership (the classic 50/50 partnership) and you disagree on a major business decision, who wins?

In most template operating agreements, the answer is: nobody. You are stuck. A true deadlock with no resolution mechanism can paralyze a business. Decisions that require member approval cannot be made. Contracts cannot be signed. Strategic pivots cannot happen. In the worst cases, one partner files a legal action to dissolve the company.

A well-drafted operating agreement addresses deadlock directly. Common mechanisms include a designated tiebreaker (a third member, an agreed-upon advisor, or an arbitrator), a buyout trigger that kicks in after a defined deadlock period, or a tiered escalation process that moves from negotiation to mediation to a forced sale.

None of these are pleasant to think about when you are forming a business with someone you trust. That is exactly why they need to be in the agreement before a dispute arises, not after.

No Exit Provisions

What happens if a member wants to leave the business? What if they die? What if they become incapacitated? What if they get divorced and their ownership interest becomes part of a marital estate?

Template operating agreements are largely silent on all of these. The result is that your business can end up co-owned with a deceased member’s estate, an ex-spouse, or a creditor. None of whom you chose as a business partner, and none of whom may share your vision for the company.

The provisions that address this are called buyout provisions (or buy-sell provisions), and they should cover at minimum:

Voluntary exit: what happens when a member wants to leave voluntarily, including how their interest is valued and the timeline for a buyout
Death or incapacity: whether the deceased or incapacitated member’s interest transfers to their estate or heirs, or triggers a mandatory buyout
Divorce: whether a member’s ownership interest can be transferred to a spouse as part of a divorce settlement, and if not, what protections are in place
Creditor claims: whether a creditor who obtains a charging order against a member’s interest can force a distribution or compel a sale

Getting this right requires not just drafting, but also coordination with any life insurance or buy-sell insurance the members carry. The agreement and the insurance should be designed to work together.

Vague Decision-Making Authority

Who can sign a contract on behalf of your LLC? Who can open a bank account, hire an employee, take on debt, or commit the company to a lease? Can one member do these things unilaterally, or do they require approval?

Many operating agreements divide decisions into two buckets: things the manager (or managing member) can do alone, and things that require member approval. The problem is that templates often define these categories so broadly that almost everything requires a vote, or so narrowly that one person can commit the company to significant obligations without the others knowing.

A clear operating agreement specifies:

Which decisions require unanimous member consent (selling the company, taking on major debt, admitting new members)
Which decisions require majority approval
Which decisions the manager can make unilaterally within defined parameters (ordinary course of business transactions under a dollar threshold, for example)
Whether any specific decisions require a supermajority (75% or 80%) rather than a simple majority

This is not just about protecting members from each other. It is also about protecting the company in its dealings with third parties. A vendor or lender who contracts with one member without realizing that member lacked authority to bind the company creates a dispute nobody wants.

No Capital Call Provisions

What happens if the business needs additional cash from its members? Can members be required to contribute more capital, or is that voluntary? If a member cannot or will not contribute during a capital call, what happens to their ownership percentage?

Template agreements almost never address this clearly. In a growing company that needs to raise internal capital to fund operations or expansion, the absence of these provisions becomes a serious problem fast.

A functioning operating agreement should specify whether capital calls are permitted, what process triggers one, what happens if a member fails to meet a capital call (dilution is the most common consequence), and whether the contributing members have the right to fund the non-contributing member’s share and receive additional equity in exchange.

Missing Transfer Restrictions

Can a member sell their ownership interest to anyone they want? Can they bring in an outside investor without the other members’ consent?

Without transfer restrictions, the answer under most default state LLC laws is: it depends, and possibly yes. That means your carefully chosen business partner could, in theory, sell their interest to a stranger, a competitor, or a private equity fund, and you would have little recourse.

The provisions that address this are:

Right of first refusal: before selling to a third party, a member must first offer the interest to the existing members at the same price and terms
Right of first offer: a member who wants to sell must first offer the interest to existing members at a price they set, before going to the market
Drag-along rights: if a majority of members want to sell the company, they can require minority members to sell on the same terms
Tag-along rights: if a majority sells, minority members have the right to participate in the sale on the same terms

These provisions balance the interests of members who want liquidity with the interests of members who want control over who their co-owners are.

No IP Assignment Clause

Who owns the intellectual property that members contribute to or create for the LLC?

If a founder develops a product, a brand, software, or a process before the LLC is formed, and then contributes it to the LLC, the operating agreement should clearly document that transfer. Without it, the IP may still legally belong to the individual, not the company. That creates significant problems if the company is ever sold, funded, or dissolved.

Similarly, if members create IP during the life of the company (a new product line, a proprietary system, a brand extension), the operating agreement should confirm that IP created in the scope of LLC business belongs to the LLC, not the individual member who created it.

This is an area where the operating agreement intersects with IP law, and where the details matter. An assignment that is too broad can strip members of pre-existing work they never intended to transfer. One that is too narrow can leave the company without clear ownership of its most valuable assets.

What to Do If Your Agreement Has These Gaps

If you formed your LLC more than a year ago and have not had your operating agreement reviewed since, now is a good time. The review does not have to be expensive or comprehensive. A focused look at the provisions above can identify the gaps that matter most for where your business is today.

The right time to fix an operating agreement is before there is a dispute, before a member wants to leave, and before the company’s value makes the stakes high enough that everyone has a strong incentive to fight over the details. That time is usually earlier than founders expect.

If you are forming a new LLC, resist the temptation to use a template. The filing fee savings are real; the cost of a document that does not actually address how your specific business will be governed is also real, and tends to show up at the worst possible moment.

This article is for informational purposes only and does not constitute legal advice. For guidance specific to your situation, book a consultation with Antonella Colella, Esq.