Key Takeaways

  • A member agreement (also called an operating agreement) is a legally binding contract outlining the rights, responsibilities, and obligations of LLC members.
  • It covers essential governance details, including ownership percentages, voting rights, profit distribution, management structure, and dispute resolution.
  • Even if not legally required in your state, having a written member agreement helps prevent conflicts, clarify expectations, and protect your business’s limited liability status.
  • There are variations of member agreements—single-member, multi-member, member-managed, or manager-managed—depending on your LLC’s structure and operational needs.
  • A comprehensive member agreement should also include provisions for membership changes, dissolution procedures, and confidentiality.

It is important to have a member agreement for your LLC in place, whether you're planning to run your company on your own or in partnership with additional owners, or members.

What Is an Operating Agreement?

Companies that are organized using a corporation business structure have corporate bylaws in place that document the operations and expectations of the company. An LLC needs to have a similar document in place. Rather than corporate bylaws, however, an LLC will need to draft a member agreement, otherwise known as an Operating Agreement. A member agreement may be referred to using a number of different terms, including:  

  • LLC Operating Agreement  
  • LLC Bylaws  
  • LLC Setup Agreement  
  • LLC Partnership Agreement
  • LLC Operations Agreement  
  • Limited Liability Company Operating Agreement

Regardless of the term you use to refer to your member agreement, this document is used to detail the guidelines for your company in a similar way that the Articles of Incorporation for a corporation govern its operations. The specific details included in your member agreement will vary depending on factors such as:  

  • Tax considerations  
  • How many members your company has  
  • The company's management structure  
  • Investments and profit sharing structure

If your company includes more than one member, your member agreement will become a legally binding contract between you and the rest of the LLC members. If your company is going to include two or more members, who will all be involved in the company's daily business activities, you'll want to use what is known as a Multiple Member-Managed LLC Operating Agreement. If, however, you have multiple members and not all of them intend to be involved in daily operations, you'll need to use the Manager-Managed LLC Operating Agreement. Or, if you are going to be the only LLC member, you'll simply need the Single Member LLC Operating Agreement.

Essential Clauses to Include in a Member Agreement

A well-drafted member agreement goes beyond basic ownership details—it functions as the backbone of your LLC’s governance. Including the right clauses ensures clarity, reduces disputes, and helps maintain compliance with state laws. Here are the most critical sections to address:

  • Member Contributions and Ownership Percentages: Clearly state how much each member is contributing (cash, property, or services) and what percentage of ownership that contribution represents.
  • Voting Rights and Decision-Making: Outline how voting power is allocated—proportionally to ownership interest or equally among members—and how major decisions will be approved.
  • Profit and Loss Distribution: Detail how profits and losses will be allocated among members. This section should align with the LLC’s tax election and ownership stakes.
  • Roles, Duties, and Management Authority: Define each member’s responsibilities, whether the LLC is member-managed (all members participate in day-to-day decisions) or manager-managed (delegated authority to specific individuals or non-members).
  • Meetings and Record-Keeping Requirements: Set expectations for meeting frequency, voting procedures, and documentation to keep operations transparent and legally sound.
  • Transfers of Membership Interest: Include procedures for selling, gifting, or transferring membership interests and whether other members have a right of first refusal.
  • Admission of New Members: Specify conditions under which new members can be admitted and how their rights and obligations are determined.
  • Dispute Resolution Mechanisms: Establish steps for resolving conflicts, such as mediation or arbitration, before resorting to litigation.
  • Dissolution and Exit Strategy: Define how the LLC will dissolve, how assets will be distributed, and what happens if a member wants to leave or passes away.

Including these clauses ensures your member agreement provides comprehensive guidance, minimizes legal risk, and keeps the LLC functioning smoothly.

Why You Should Have an Operating Agreement

Having a member agreement, or Operating Agreement, is a requirement in some states. Even if your state does not specifically require your LLC to have a member agreement in place, it is still a good idea to draft one because they serve other important purposes. If, for example, your company will have more than one member, it's important to have a written member agreement in place.

An LLC with more than one member will want to put a Multiple Member-Managed LLC Operating Agreement in place that outlines how members, or owners, are expected to manage the company's daily functions. LLC companies with multiple members are more susceptible to ending up in a dispute if members fail to establish proper expectations in the company's formative stages. Starting a new business can be very exciting. Regardless of this excitement, it's important to outline these expectations early so there are no misunderstandings later on in the company's lifecycle.

A lot of people are hesitant to have difficult conversations about how to handle things when you no longer get along or the company does not perform well, but these are important details that should be worked out among the LLC's members as early as possible.

If your company has more than one member and not all of them are going to play an active role in the daily operations of the business, you'll most likely want to draft a Manager-Managed LLC Operating Agreement. If, however, all of the members plan to have a hands-on role in the company, it's not necessary to overcomplicate the member agreement. In this case, it's fine to keep things simple as long as all members agree with the items included in the agreement.

In an LLC, members are effectively owners of the company. The only real reason to transition from a Multiple Member LLC to a Manager-Managed LLC is to protect members' privacy by including only the names of the company's managers when you file documents with your Secretary of State. Managers are not necessarily required to be members. This makes manager-managed LLCs potentially more private structures than member-managed LLCs.

If you want to keep things simple, though, a Multiple Member-Managed LLC Operating Agreement should be more than sufficient for you and the rest of the company's members.

Legal and Practical Benefits of a Member Agreement

While not always required by law, a written member agreement offers numerous legal protections and operational advantages. It formalizes the internal rules of your LLC and reduces potential misunderstandings among members. Some of the most significant benefits include:

  • Legal Protection and Limited Liability: A signed member agreement reinforces the separation between the business and its owners, which helps maintain limited liability protection in the event of lawsuits or debt.
  • Avoiding Default State Rules: Without an agreement, your LLC will be governed by generic state statutes, which may not align with how you want to run your business. A member agreement allows you to customize governance.
  • Conflict Prevention and Resolution: Clear provisions on decision-making, profit sharing, and dispute resolution reduce the likelihood of member disagreements escalating into costly litigation.
  • Clarity for Investors and Lenders: If you seek outside funding, a detailed member agreement demonstrates sound governance, which builds credibility with investors and lenders.
  • Succession and Continuity Planning: The agreement can define how ownership will be transferred if a member dies, becomes incapacitated, or chooses to exit, ensuring business continuity.
  • Flexibility in Operations: Unlike corporate bylaws, a member agreement allows LLCs to customize their internal structure, from management style to tax treatment, giving you more control over your business.

Ultimately, the member agreement acts as a roadmap for your LLC’s future, guiding operations, protecting members, and reducing legal vulnerabilities.

Frequently Asked Questions

  1. Is a member agreement legally required for an LLC?
    Not in all states. However, even if not required, it is highly recommended as it helps protect your LLC’s legal status and prevents disputes among members.
  2. Can I draft a member agreement without a lawyer?
    Yes, but legal guidance is advisable to ensure the agreement is enforceable and tailored to your business’s needs. A poorly drafted agreement can lead to legal complications.
  3. What happens if an LLC operates without a member agreement?
    Without one, the LLC will default to state laws, which may not reflect your intentions for profit distribution, management, or dispute resolution.
  4. Can a member agreement be changed after formation?
    Yes. Members can amend the agreement at any time, usually through a formal vote or unanimous consent, as outlined in the agreement itself.
  5. What’s the difference between a member agreement and articles of organization?
    The articles of organization establish your LLC with the state, while the member agreement governs its internal operations, member relationships, and day-to-day functioning.

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