Key Takeaways

  • A standard operating agreement is essential for clearly defining ownership, responsibilities, and dispute resolution in a two-member LLC.
  • Even if not legally required, a well-drafted agreement reinforces legal protection, tax flexibility, and internal governance.
  • State default laws can override business intentions if no operating agreement exists.
  • Including key components like capital contributions, profit distribution, and decision-making processes minimizes future conflicts.
  • Templates exist but should be customized based on specific business needs.
  • Exit strategies, buyout procedures, and amendment rules are critical for continuity.
  • Legal review is recommended to ensure compliance and protection.

A two-member LLC operating agreement is a document that outlines the ownership and operational structures and procedures of a limited liability company (LLC) with two owners, also known as members. While an operating agreement is not a requirement for forming an LLC in many states, it serves the important purpose of keeping the company operating smoothly and efficiently, with minimal misunderstandings and disputes.

What Is an Operating Agreement?

The purpose of an operating agreement is to provide the guidelines for governing the operation of an LLC. The details of the agreement vary depending on the number of members, management structure, investment, tax considerations, profit-sharing, and other factors. In an LLC with more than one member, this document serves as a binding contract between members.

Importance of an Operating Agreement

There are some states that require business owners to file an operating agreement as part of the LLC formation process. Sometimes, only LLCs with more than one member are required to have an operating agreement. Whether or not it is mandatory by law, an operating agreement can be beneficial to an LLC in a number of ways:

  • Gives owners control of the business: Without an operating agreement, many aspects of an LLC will be subject to state laws, also known as default rules. State laws act as a standard operating agreement for an LLC that does not have its own.
  • Offers personal liability protection for owners: Without an operating agreement, owners of an LLC can be susceptible to personal liability if they are seemingly running the company like a sole proprietorship or partnership.
  • Provides all owners with clear details of business arrangements: When all owners have a clear understanding of the procedures and rules of the LLC, there will be fewer misunderstandings and disputes.

Why Does a Two-Member LLC Need an Operating Agreement?

A multimember LLC, including a two-member LLC, is more likely to experience disputes if the owners fail to establish clear lines of communication with each other during the early stages of the company. To minimize disputes in the future, all members should voice their concerns and write them down in an operating agreement. For instance, they need to discuss what actions they should take if they do not like other members of the LLC in the future.

An operating agreement for a two-member LLC will explain in great detail what the owners should do if a certain member is not doing his or her share of work or decides to leave the company.

Legal and Practical Consequences of Not Having an Agreement

Without a written operating agreement, a two-member LLC becomes subject to the default rules of its formation state, which may not reflect the members’ intentions. Some consequences of skipping this essential document include:

  • Loss of Control: State default provisions may dictate how profits are split, how votes are counted, and how decisions are made—regardless of your preferences.
  • Increased Risk of Disputes: With no written record of roles, contributions, or responsibilities, disagreements can become personal and litigious.
  • Uncertain Succession: If one member dies or becomes incapacitated, the remaining member may face legal hurdles in retaining control.
  • Piercing the Corporate Veil: Courts may disregard the LLC’s limited liability protection if there’s insufficient documentation to show it is operating as a separate entity.

A well-constructed standard operating agreement is more than a formality—it is a strategic safeguard for continuity and stability.

Which Operating Agreement to Use

If your LLC has two owners who will be involved in the daily operations of the company, you should use the multimember member-managed LLC operating agreement. On the other hand, if both the members will not be involved in the LLC's day-to-day operations, the manager-managed operating agreement is a better option.

The multimember operating agreement is specially designed for LLCs with more than one owner. It is the only document that designates an LLC's owners and the percentage of the company they own. Both members should sign the operating agreement in the presence of a notary public. Copies of it should be given to the members, while the original should be kept at the LLC's principal address.

Choosing and Customizing a Standard Operating Agreement

While free templates for standard operating agreements are widely available online, they are only a starting point. A standard operating agreement must reflect your business’s specific circumstances. When choosing or customizing a template, consider the following:

  • Industry Requirements: Certain industries (e.g., financial services or healthcare) may require specific clauses to meet compliance or regulatory standards.
  • State Law Differences: Operating agreements should account for any specific state requirements or default rules that could impact the business.
  • Business Goals: An agreement should reflect your short-term operations and long-term goals, including expansion, bringing on new members, or dissolution planning.

Although a standard operating agreement provides structure, customization ensures it works effectively for your business. For tailored legal help, you can connect with a vetted attorney on UpCounsel. 

What to Include in an Operating Agreement

An operating agreement is specially created to address the unique needs and goals of a particular company. As such, there is no one-size-fits-all approach to drafting an operating agreement. However, almost every operating agreement includes these basic provisions:

  • Identifying information: Name of the LLC and addresses of the principal business office and registered office
  • Statement of intent: A statement confirming the operating agreement complies with state laws and the LLC will be officially established once the required documents are submitted to the state
  • Business purpose: Nature and purpose of the business, as well as a statement to cover possible changes in the future, such as "and for other lawful purposes”
  • Term: Duration of the LLC's existence, which can be until the dissolution of the LLC or the duration of a project
  • Tax treatment: Tax status of the LLC, which can be sole proprietorship, partnership, C-corp, or S-corp
  • Addition of new members: Manner in which the two-member LLC accepts new members

Additional Key Clauses in a Standard Operating Agreement

In addition to the essential sections already mentioned, a strong standard operating agreement for a two-member LLC should also consider including:

  • Initial Capital Contributions: Clearly outline what each member is contributing in terms of cash, property, or services. Specify whether additional contributions may be required later.
  • Profit and Loss Allocations: Define how profits and losses will be allocated, typically based on ownership percentages, but this can be adjusted by mutual agreement.
  • Voting Rights and Procedures: Outline how decisions will be made and whether both members have equal voting power or weighted votes based on ownership stakes.
  • Banking and Financial Controls: Clarify which members can open business bank accounts, authorize expenditures, or sign checks.
  • Transfer of Membership Interests: Set procedures and restrictions on transferring ownership shares, such as requiring unanimous approval or offering the interest first to the remaining member.
  • Buy-Sell Provisions: Establish what happens if one member wants to leave, becomes disabled, or dies. Common mechanisms include right of first refusal, valuation methods, and payment terms.
  • Dispute Resolution: Include mediation or arbitration clauses to avoid costly court battles.
  • Amendment Procedures: Specify how the operating agreement can be changed, usually requiring unanimous or majority approval.

Frequently Asked Questions

  1. Do I need a lawyer to draft a two-member LLC operating agreement?
    While not legally required, working with a lawyer ensures the agreement aligns with your goals and complies with state laws.
  2. Can two members have unequal ownership in an LLC?
    Yes, ownership percentages can differ. These should be clearly detailed in the operating agreement, along with profit/loss allocation.
  3. Is a verbal operating agreement legally binding?
    In some states, verbal agreements may be recognized but are difficult to enforce and less protective than written ones.
  4. How do I amend a standard operating agreement?
    Include an “Amendment” clause in your agreement. Most require both members’ consent to update the terms.
  5. What happens if one member wants to leave the LLC?
    Your operating agreement should outline buyout terms and transfer procedures. Without it, state law determines the outcome.

If you need help with creating a two-member LLC operating agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 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.