LLC Shareholder Agreement: Key Provisions and Benefits

Key Takeaways

• LLCs don't technically have shareholders, but “LLC shareholder agreements” are often drafted in LLC settings to clarify ownership rights and internal procedures.
• Shareholder-style provisions (like buy-sell agreements, drag-along/tag-along rights) can be adapted into LLC operating or membership agreements.
• An LLC operating agreement can serve many of the same functions as a shareholder agreement does in a corporation, offering crucial governance clarity.
• Including dispute resolution clauses, voting rights, and transfer restrictions in the agreement can prevent costly litigation and internal conflicts.
• A well-drafted agreement helps maintain control, protect financial interests, and ensure business continuity in events like death, divorce, or departure of members.

An LLC shareholder agreement encompasses the specific expectations between the different shareholders of the business. A limited liability company (LLC) is in some ways similar to a corporation but with less formal of requirements.

Advantages of an LLC

Many business owners choose to form an LLC because of the following advantages:

• To protect the business owner with limited liability
• To benefit from pass-through taxation, similar to a sole proprietorship or partnership structure

Although LLCs are common due to their tax and limited liability advantages, it can be difficult to find clarity when an issue arises that is not mentioned in the governing documents. Different LLC members often have different interests. If a disagreement occurs, it can be difficult to determine the best solution.

Generally speaking, an LLC does not have shareholders. Instead, partners or contributors are referred to as members. An operating agreement sets the specific terms of the LLC membership.

LLC Membership Agreement

One of the first and most important steps in creating an LLC is to create a membership agreement. An LLC membership agreement should include the following points:

• Management expectations and positions
• How profits and losses will be handled
• The specific membership rights
• The required process to terminate the LLC
• The acceptance and termination process of members

It is important to keep in mind that the LLC membership agreement is a legal document. This means that it is legally enforceable and all members should carefully review it before signing. Although some states do not require that an LLC membership agreement is created before starting a business, it is always a good idea to create one regardless.

An LLC membership agreement protects personal liabilities while also clearly listing the expected operating terms of the business. A membership agreement can prevent misunderstandings from occurring between business partners. Shareholder agreements are especially useful for small businesses in which the members are active in the day to day operations of the business.

Essential Clauses in an LLC Shareholder Agreement

While the term “LLC shareholder agreement” is a misnomer—since LLCs have members, not shareholders—many business owners still use this term to refer to customized agreements that define ownership rights and responsibilities. These documents often mirror corporate shareholder agreements and may include:

• Capital Contributions and Ownership Interests: Clearly define each member’s financial stake and what was contributed (cash, services, or assets).
• Profit and Loss Allocation: Outline how profits and losses will be distributed, which may differ from ownership percentages if agreed upon.
• Voting Rights and Procedures: Specify how major business decisions will be made—unanimously, by majority, or by weighted voting based on ownership interest.
• Membership Transfers and Exit Strategy: Set rules around transferring membership interests, buyout options, and valuation methods to protect the business from unwanted third-party involvement.
• Management Structure: Define whether the LLC is member-managed or manager-managed and the roles of each member in daily operations or strategic decisions.
• Deadlock Resolution: Include dispute resolution provisions such as mediation, arbitration, or “shotgun” clauses to break ties when members are deadlocked.

These provisions protect all parties by creating a roadmap for decision-making and conflict resolution.

LLC Shareholder Agreement

Shareholder agreements are often used in a corporation setting rather than in LLCs. However, LLC companies can also benefit from shareholder agreements. If you are going to use a shareholder agreement in an LLC setting, it is important to understand the process and to ensure that it makes sense for your business.

There are a few specific provisions that are often found in shareholder agreements that could benefit an LLC membership:

• Buy/sell provision: Buy/sell provisions are used to place a monetary amount on a member's interests for tax purposes after their death.
• Texas shotgun provision: This process involves one member choosing a buying point in which they would purchase another parties interest.
• Drag along/Tag along provision: Any members with more than 50 percent membership can set the price of the sale of the interest in the company.
• Rights of first refusal provision: The other members of the LLC must refuse the sale of interests before a member can sell to an outside party.

It is best to evaluate each provision in the shareholder agreement before applying it to an LLC business setting. Some provisions will be useful to a company whereas others will not make sense.

When Should an LLC Use a Shareholder Agreement?

Using an “LLC shareholder agreement” is especially helpful in the following scenarios:

• Multi-Member LLCs: When there are multiple members, a detailed agreement helps prevent misunderstandings and potential litigation.
• Family-Owned or Closely Held LLCs: In these entities, relationships are often personal. An agreement ensures the business relationship is clearly separated and protected.
• LLCs Seeking Investment: Potential investors often require clear governance documents that mirror corporate-style agreements to safeguard their interests.
• Exit Planning or Succession Goals: The agreement can lay out terms for retirement, death, or voluntary exits, protecting the business’s continuity.

Although LLCs are flexible entities, adapting corporate-style agreements can bring structure to key events and protect member interests.

LLC Operating Agreement

An LLC operating agreement is a mix between a shareholder agreement and an LLC membership. It often includes the specific bylaws and agreements of the business. One of the biggest advantages of an LLC operating agreement is that it fills in the often unambiguous parts of an LLC membership agreement. There are default provisions which take place when questions arise and a solution is not available. For this reason, many states require that all LLCs have an operating agreement in place. A few examples of fill-in provisions include:

• A mandatory member vote on how to handle profits and losses
• A majority vote is required for admitting new members
• A majority vote is needed for amending any LLC agreement articles
• LLC members must hold, minimally, annual meetings
• Profits are divided among members based on their individual contributions

Keep in mind that all provisions will not work for every business. It is necessary to determine what type of agreement works best for yours.

Differences Between an LLC Shareholder Agreement and Operating Agreement

While both documents cover overlapping areas, they serve slightly different purposes:

An LLC operating agreement is broader and more procedural, while an LLC shareholder agreement (or membership agreement) may focus more on ownership relationships and contingency planning.

Why Legal Counsel Matters for LLC Shareholder Agreements

Each LLC has unique needs, and a one-size-fits-all agreement could leave members exposed to risk. Legal counsel can ensure your agreement:

• Complies with state laws and avoids unenforceable clauses
• Accurately reflects verbal understandings in writing
• Anticipates disputes or life changes (divorce, bankruptcy, death)
• Is customized for industries with specific regulatory obligations

If you need help drafting or reviewing an LLC shareholder agreement, you can find a vetted business attorney through UpCounsel.

Frequently Asked Questions

• Does an LLC have shareholders?
  No, LLCs have members, not shareholders. However, the term “LLC shareholder agreement” is often used informally to refer to agreements that govern member ownership rights.
• Can an LLC have a shareholder agreement?
  Yes, although technically for corporations, shareholder-style agreements can be adapted for LLCs to clarify ownership rights, buyout terms, and member responsibilities.
• What should be in an LLC shareholder agreement?
  It should include capital contributions, profit sharing, voting rights, membership transfer rules, management structure, and dispute resolution processes.
• How does a shareholder agreement differ from an operating agreement?
  An operating agreement covers daily management and internal governance, while a shareholder agreement focuses more on ownership rights and exit strategies.
• Do I need a lawyer to create an LLC shareholder agreement?
  Yes, it’s recommended. A lawyer ensures the agreement is enforceable, tailored to your business needs, and compliant with state laws. You can connect with experienced attorneys on UpCounsel.

If you need help with creating an LLC shareholder agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top five percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.