What an LLC Operating Agreement Should Cover

Limited liability companies (LLCs) are versatile legal entities that offer the liability protections of corporations and the operational flexibility and tax advantages of partnerships and sole proprietorships. The central governing documents of LLCs are operating agreements, and Missouri law allows LLCs broad latitude to draft operating agreements (RSMo § 347.081). However, without a customized operating agreement, an LLC is subject to the default statutory rules, which may or may not lead to desirable outcomes. That’s why it’s so important to work with a Springfield business lawyer to craft an operating agreement that takes your business’ unique needs, goals, and values into account. 

Ownership Structure and Capital Contributions 

Missouri business law does not force rigid ownership structures or contribution rules. Rather, it allows LLC members (i.e., owners) to set their own membership and capital contribution terms. As such, an operating agreement should cover at least the following matters: 

• Member identification: The names and contact information for each member
• Percent ownership: The percent of the LLC each member owns
• Initial capital contributions: What each member is contributing at formation and how those contributions are valued
• Future capital contributions: Decide whether additional contributions will be required or optional, and on what terms

Management Structure 

There are two main ways LLCs can be managed: member-managed or manager-managed. With a member-managed structure, most members actively participate in the day-to-day operations and decision-making of the company. Using this structure, the operating agreement should specify which manager is authorized to handle which duties and whether members may share responsibilities. With a manager-managed structure, some members (or even non-members) are appointed as managers and given decision-making authority. Using this structure, the operating agreement should specify which decisions managers can make independently and which require member input. 

Voting Rights and Decision-Making

Voting rights are an essential consideration for any LLC, as they guide how the decision-making process will play out. The following are a few voting-related considerations every LLC operating agreement should cover: 

• Vote allocation, including whether each member gets one vote, votes are weighted by ownership percentage, or there are special voting classes
• Vote thresholds, including whether a simple majority or supermajority is required for various types of decisions
• Meeting mechanics, including when and where meetings will be held, how notice will be given, what constitutes a quorum, and whether proxy voting is permitted 

Given the central role voting plays in the operations of an LLC, please consider working with a Springfield business lawyer when crafting the decision-making provisions in your operating agreement. 

Allocation of Profits and Losses 

There are several ways to allocate an LLC’s profits and losses. One method is to allocate according to ownership percentages, with larger ownership percentages receiving a larger share of the profits and losses. Another is to allocate according to the labor invested in the LLC, with members who put in greater labor receiving a greater share of profits and losses, even if their capital contribution was smaller. The operating agreement should also specify when distributions will be made — i.e., monthly, quarterly, annually, or at the LLC’s discretion. And while Missouri law allows LLCs to make non-cash distributions, RSMo § 347.105 requires non-cash distributions to be equal in value to cash. 

Transfer of Interests

Major life events for LLC members — death, disability, retirement, etc. — can have profound impacts on the LLC’s operations. As such, the operating agreement should clearly spell out when, how, and why members may transfer their interests. Relevant considerations include: 

• Whether transfers are permitted at will or require the consent of other members
• Whether existing members have a right of first refusal for an exiting member’s interest
• How the exiting member’s interest will be valued 
• How buy-outs will be paid 

These are but a few considerations related to business succession planning. For more comprehensive information on business succession planning for LLCs, please speak to a Springfield business lawyer. 

Duties and Restrictions

The members of LLCs often receive sensitive information that could harm the business if revealed or could unjustly enrich a member if used incorrectly. To mitigate such risks, operating agreements should include provisions stating what each member’s duties are with respect to the LLC. Common duties and restrictions in LLC operating agreements include: 

• Fiduciary duties: The nature and scope of the duties members owe each other (typically care, loyalty, and good faith) 
• Non-compete provisions: Restrictions on where and how a member can compete with the LLC post-exit
• Non-solicitation provisions: Restrictions on former members soliciting the LLC’s employees or clients
• Confidentiality clauses: Requirements that members maintain the confidentiality of the LLC’s trade secrets, product plans, financial data, etc., even after they exit. 

The LLC operating agreement may also provide for legal enforcement mechanisms if any of these duties or restrictions are breached. 

Dispute Resolution 

Even tight-knit business partners who are on the best of terms can come to disagreements, which is why an operating agreement should address how disputes are to be resolved. Many operating agreements require mediation or arbitration as a first step in the dispute resolution process, with litigation reserved only for disputes that cannot be resolved through those alternative methods. For disputes that progress to litigation, the operating agreement should specify which state’s laws will apply (e.g., Missouri) and the venue in which litigation will occur (e.g., Greene County Associate/Circuit Court), as well as how fees and costs will be allocated. 

Dissolution and Wind-Up 

Even if an LLC’s members do not expect the company to dissolve any time soon, the operating agreement should still plan for such an event. Events that can trigger dissolution include a vote of all members, the sale of all assets, or the death or withdrawal of a member. The agreement should also cover the specifics of how the business’ operations will be wound up, including who will handle the liquidation, how creditors will be paid, how profits and remaining capital contributions will be distributed, and how final tax matters will be handled. 

Keep Your LLC on the Right Track With a Springfield Business Lawyer 

Every LLC is unique. Therefore, every LLC should have a unique operating agreement that supports the business’ goals. To get started on crafting an operating agreement for your LLC, please contact a Springfield business lawyer at the LifeGen Law Group by calling 417-823-9898 or using our online contact form.