LLC Operating Agreements:
The Complete Guide for Business Owners

If you are starting or growing a business, chances are you have heard that a limited liability company (LLC) is one of the most popular and flexible ways to structure your venture. LLCs combine the liability protection of a corporation with the tax advantages of a partnership, making them a go-to choice for entrepreneurs across the country. According to the U.S. Small Business Administration, the LLC is one of the most common business structures chosen by small business owners today.

But forming an LLC is only the first step. The real backbone of any well-run LLC is its operating agreement, the internal document that defines how the company is managed, how profits are shared, and what happens when members disagree, want to leave, or need to bring on new partners. Without a comprehensive operating agreement, your business defaults to state law rules that may not align with your goals, and disputes can become expensive and time-consuming.

Whether you are launching a startup in Oklahoma City, building a family business in Tulsa, or structuring a joint venture with partners across the state, this guide walks you through every critical provision of an LLC operating agreement and explains why getting it right from day one can save you significant time, money, and headaches down the road.

Table of Contents

• What Is an LLC Operating Agreement?
• Why Every LLC Needs an Operating Agreement
• Management Structures: Member-Managed vs. Manager-Managed
• Members, Membership Interests, and Voting Rights
• Capital Contributions and Capital Accounts
• Allocations, Distributions, and Tax Considerations
• Transfer Restrictions: Controlling Who Owns Your Business
• Fiduciary Duties and Indemnification
• Dissolution and Winding Up
• Oklahoma-Specific Considerations
• Common Operating Agreement Mistakes to Avoid
• Getting Professional Help with Your Operating Agreement

What Is an LLC Operating Agreement?

An LLC operating agreement is a legally binding contract among the members (owners) of a limited liability company. It serves as the internal rulebook for the business, governing everything from day-to-day management decisions to what happens if a member passes away, becomes incapacitated, or simply wants out of the business.

Think of it this way: the articles of organization you file with the state create the LLC as a legal entity, but the operating agreement is what actually tells everyone how the company works behind the scenes. It is the combination of corporate bylaws and a stockholders’ agreement, all rolled into one flexible document.

Operating agreements typically address the following core areas:

• Management structure and decision-making authority
• Membership interests, including voting rights and different classes of ownership
• Capital contributions from each member and how additional funding is handled
• Profit and loss allocations and distribution priorities
• Transfer restrictions that control who can buy, sell, or inherit membership interests
• Dissolution procedures for when the company winds down
• Tax elections and reporting responsibilities

Why Every LLC Needs an Operating Agreement

Even in states where an operating agreement is not legally required, there are compelling reasons every LLC should have one, whether it has one member or twenty.

Protecting Your Limited Liability Status

One of the primary reasons entrepreneurs choose the LLC structure is to protect their personal assets from business liabilities. However, courts can “pierce the corporate veil” and hold members personally liable if the LLC is not being operated as a separate entity. A formal operating agreement demonstrates that the business has established governance procedures and is being run as a distinct legal entity, not just an extension of the owners’ personal affairs.

Preventing Costly Disputes

Business disputes among co-owners are common, and without clear written rules, disagreements over management decisions, profit sharing, or exit terms can lead to expensive litigation. An operating agreement establishes the ground rules before tensions arise, giving all parties a clear framework for resolving conflicts.

Satisfying Banks and Investors

Financial institutions, lenders, and potential investors will almost always ask to see your operating agreement before extending credit or making an investment. Without one, opening a business bank account can be difficult, and raising capital becomes significantly more challenging.

Customizing the Rules for Your Business

State default rules are one-size-fits-all. An operating agreement lets you tailor provisions to the unique circumstances of your company. For example, you might want to give a minority member veto power over certain decisions, or you might want to create a management structure that separates day-to-day operations from strategic oversight. Only an operating agreement gives you that flexibility.

Management Structures: Member-Managed vs. Manager-Managed

One of the most important decisions in any operating agreement is how the LLC will be managed. This choice affects everything from who signs contracts to who makes hiring decisions, and it has significant implications for liability and authority.

Member-Managed LLCs

In a member-managed LLC, all members participate directly in the management and operation of the business. Each member typically has the authority to bind the LLC in contracts and business dealings. This structure works well for smaller companies where all owners are actively involved in operations.

Under most state laws, if the operating agreement is silent on management structure, the LLC is considered member-managed by default. However, relying on this default without specifying the details can lead to confusion about decision-making authority, especially as the business grows.

Manager-Managed LLCs

In a manager-managed LLC, one or more designated managers (who may or may not be members) are responsible for the company’s day-to-day operations and strategic decisions. The non-managing members function more like passive investors, participating in major decisions through voting rights but not running daily operations.

Manager-managed structures are common in larger or more complex businesses, real estate investment LLCs, and companies where some members are purely financial investors without operational expertise.

Board of Managers

Some LLCs establish a board of managers that functions similarly to a corporate board of directors. This structure is often used in private equity transactions, joint ventures, and other sophisticated business arrangements where formal governance procedures are important. The board typically makes strategic decisions while delegating day-to-day management to appointed officers.

Key Management Provisions to Include

Regardless of which management structure you choose, your operating agreement should address several critical issues:

• Scope of authority: What actions can the manager take independently, and what requires member approval?
• Appointment and removal: How are managers appointed, and under what circumstances can they be removed?
• Compensation: Is the manager entitled to compensation for their services?
• Decision-making procedures: How are management decisions made? Are there quorum requirements? Can managers act by written consent?
• Limitations on authority: What major decisions (such as selling the company’s assets, taking on significant debt, or admitting new members) require member approval?

Members, Membership Interests, and Voting Rights

The members section of an operating agreement addresses who owns the company, what rights come with ownership, and how those rights can change over time.

Identifying the Members

The operating agreement should clearly identify every member by name and address, along with their initial capital contribution and percentage ownership. This information is usually contained in a schedule attached to the agreement, making it easy to update as the membership changes.

Different Classes of Membership Interests

LLCs have tremendous flexibility when it comes to structuring ownership. Unlike corporations, which are generally limited to common and preferred stock, LLCs can create virtually any number of membership interest classes with customized voting rights, economic rights, and other privileges.

For example, an LLC might create:

• Class A interests held by investors with preferred distribution rights but limited voting power
• Class B interests held by founders with full voting rights and a share of future profits
• Profits interests issued to key employees as an incentive, giving them a share of future growth without existing equity

A profits interest is a particularly useful tool for LLCs looking to incentivize management or key employees. Unlike a capital interest (which represents a share of the company’s current value), a profits interest only entitles the holder to a percentage of the company’s future appreciation. This makes it an attractive compensation tool that can be structured to have minimal tax consequences at the time of grant.

Voting Rights and Consent Requirements

The operating agreement should specify how members vote on company matters, including:

• Whether voting is proportional to ownership percentage or capital contributions
• What percentage of votes is required for ordinary decisions versus major decisions
• Whether members can act by written consent instead of holding formal meetings
• What constitutes a quorum for meetings
• Whether any members have special veto rights over certain decisions

Supermajority voting requirements (such as requiring 75% approval for certain actions) are common in operating agreements with minority investors. These provisions prevent a majority owner from making unilateral decisions that could harm minority interests, such as selling the company’s primary assets or fundamentally changing the business purpose.

Admitting New Members

Your operating agreement should establish the process for admitting new members. Typically, this requires the approval of existing members (often a majority or supermajority) and execution of a joinder agreement by the new member, binding them to the terms of the existing operating agreement.

Representations and Warranties

LLC interests are considered securities under federal law, and their issuance must comply with the Securities Act of 1933 or an applicable exemption. Operating agreements typically require members to make investment representations confirming that they are acquiring their interests for investment purposes (not for resale) and that they meet applicable accredited investor or sophistication requirements.

Capital Contributions and Capital Accounts

Capital contributions are the investments that members make into the LLC in exchange for their membership interests. Understanding how contributions work and how they are tracked through capital accounts is essential for every LLC member.

Types of Capital Contributions

Members can contribute capital in several forms:

• Cash: The most straightforward type of contribution
• Property: Real estate, equipment, intellectual property, or other assets
• Services: Some agreements allow members to contribute services in exchange for membership interests (though this can create tax implications)
• Rollover equity: In acquisition transactions, a member may contribute existing equity in a target company

The percentage of membership interests a member receives in exchange for their contribution is a negotiated matter. In a simple LLC with one class of interests, ownership percentages are often proportional to capital contributions. In more complex structures with multiple classes, the relationship between contributions and ownership may differ significantly.

Additional Capital Contributions and Capital Calls

One of the most important (and often contentious) provisions in any operating agreement deals with whether members can be required to contribute additional capital after their initial investment. This is especially critical for operating companies and joint ventures that may need additional funding as the business grows.

Key questions to address include:

• Can the manager make capital calls, and if so, under what circumstances?
• Do members have to approve capital calls before they become effective?
• How much must each member contribute (typically pro rata based on ownership percentage)?
• What happens if a member cannot or will not make a required capital contribution?

Consequences of Default on Capital Calls

The consequences for a member who fails to meet a capital call can be severe and should be clearly defined in the operating agreement. Common approaches include:

• Forfeiture of voting and distribution rights until the contribution is made
• Allowing non-defaulting members to fund the shortfall, structured either as a loan to the defaulting member or as a direct purchase of additional interests at a penalty
• Forced sale of the defaulting member’s interests after a specified cure period
• Dilution of the defaulting member’s ownership percentage

Capital Accounts Explained

Each member has a capital account that tracks their economic stake in the LLC. A member’s capital account is adjusted to reflect contributions, distributions, and allocations of profit and loss. Think of it as a running scorecard of each member’s equity position in the company.

Capital accounts are typically maintained in accordance with federal tax regulations governing partnerships, and a tax advisor should review or prepare these provisions. Key rules include:

• Contributions increase the capital account
• Distributions and withdrawals decrease the capital account
• Allocations of profit increase the capital account, while allocations of loss decrease it
• When a member transfers their interest, the transferee typically inherits the transferring member’s capital account balance

Most operating agreements provide that members are not responsible for restoring deficit balances in their capital accounts. If a member were required to restore deficits (meaning cover losses that exceed their original investment), this would effectively eliminate the limited liability protection that makes the LLC structure attractive in the first place.

Allocations, Distributions, and Tax Considerations

The allocations and distributions sections are often the most heavily negotiated parts of any operating agreement because they define the economic deal among the members. Understanding the difference between allocations and distributions is critical.

Allocations: How Profits and Losses Are Assigned

Because most multi-member LLCs are treated as partnerships for federal income tax purposes, the LLC itself does not pay income tax. Instead, profits and losses “pass through” to the members, who report their respective shares on their own tax returns. This means a member who is allocated $100,000 in taxable profits must report that amount on their personal return, whether or not they actually received any cash distribution from the company.

Allocations affect each member’s capital account. Profits increase the capital account, and losses decrease it. The allocation section typically includes both “book” allocations (for capital account purposes) and “tax” allocations (which generally mirror book allocations but may differ for contributed property with built-in gains or losses).

The Target Capital Account Method

Many sophisticated operating agreements use what is known as the “target capital account” approach. Under this method, profits and losses are allocated to bring each member’s capital account to the amount that member would receive if the company were liquidated and distributed its assets according to the distribution waterfall. This ensures that the allocation section produces results consistent with the economic deal reflected in the distribution section.

Distributions: When Members Actually Get Paid

While allocations determine who gets credited with profits and losses on paper, the distribution section governs when and how members actually receive cash or other property from the company. Key distribution considerations include:

• Discretionary vs. mandatory distributions: Many operating agreements give the manager discretion over when to make distributions, while others require distributions at set intervals or when certain cash thresholds are met
• Restrictions on distributions: The LLC typically cannot make distributions if doing so would prevent it from meeting its current obligations or anticipated business needs
• Pro rata vs. waterfall distributions: Simple LLCs distribute proportionally to ownership; more complex arrangements use tiered distribution “waterfalls”

Distribution Waterfalls

A distribution waterfall is a tiered system that prioritizes payments to different classes of members. Waterfalls are especially common in LLCs with multiple classes of interests, private equity investments, and joint ventures. A typical waterfall might look like this:

1. First: To Class A members until they receive 100% of their capital contributions
2. Then: To Class A members until they receive a preferred return (such as 8% annually)
3. Then: Split 50/50 between Class A and Class B members until a certain threshold
4. Thereafter: 20% to Class A and 80% to Class B members

Tax Distributions

One of the most important distribution provisions addresses the “phantom income” problem. Because LLC members are taxed on their allocated share of profits regardless of whether they receive any cash, members can face tax bills on income they have not actually received.

To solve this problem, most operating agreements require the LLC to make tax distributions, which are cash payments to each member sufficient to cover their estimated tax liability on allocated profits. These tax distributions are typically treated as advances against future regular distributions, ensuring that no member is out of pocket for taxes on profits that remain in the company.

Transfer Restrictions: Controlling Who Owns Your Business

The transfer section is often the longest and most intensely negotiated part of an LLC operating agreement. These provisions control who can join the company as a member and under what circumstances existing members can sell or otherwise dispose of their interests.

General Transfer Restrictions

Most operating agreements begin with a blanket restriction: members cannot transfer their interests unless the transfer is specifically approved (usually by the manager or a supermajority of members) or permitted under one of the exceptions in the agreement. This prevents members from selling their interests to strangers or competitors without the knowledge and consent of the other members.

Additionally, any transfer that would cause the LLC to lose its partnership tax status (for example, by causing the LLC to be classified as a publicly traded partnership) is typically prohibited under all circumstances.

Permitted Transfers

As an exception to the general restriction, operating agreements typically allow transfers to “permitted transferees,” which commonly include:

• Immediate family members (spouse, children, parents)
• Trusts established for the benefit of the member or their family
• Affiliates and controlled entities
• Transfers in connection with an initial public offering

Right of First Refusal (ROFR)

A right of first refusal requires a selling member to first offer their interests to the other members (and sometimes the company) before completing a sale to an outside buyer. The offer must typically be on the same terms as the third-party offer.

While the ROFR is a common and effective tool for keeping ownership among existing members, it has a significant downside: it can have a chilling effect on a member’s ability to attract third-party buyers. Potential purchasers are often reluctant to invest time and money negotiating a deal when the existing members can step in and match the offer at the last minute.

Right of First Offer (ROFO)

A right of first offer works differently. Instead of waiting for a third-party offer, the selling member must first offer their interests to the other members at a price and on terms they set. Only if the members decline does the seller have the right to seek third-party buyers, but the sale to a third party cannot be on terms more favorable than those offered to the existing members.

Because the ROFO does not require the seller to have a deal in place before offering interests to other members, it is generally less restrictive on member liquidity than a ROFR. If a ROFO is included, a separate ROFR is usually unnecessary, as the procedures for both provisions can be lengthy and they ultimately achieve the same goal.

Drag-Along Rights

Drag-along rights protect majority members by allowing them to require minority members to participate in a sale of the company. If a majority member has negotiated a sale to a third-party buyer, the drag-along allows the majority to “drag” the minority into the deal, ensuring the buyer gets 100% of the company.

These provisions are especially important in private equity transactions and growth-stage companies where the ability to deliver a clean exit is critical for attracting buyers and maximizing value.

Tag-Along Rights

Tag-along rights are the mirror image of drag-along rights and protect minority members. If the controlling members sell some or all of their interests, the minority members have the right to participate in the sale on a pro rata basis, on the same terms and conditions. This prevents a majority member from cutting a favorable deal for themselves while leaving minority members stuck in the company with a new and potentially unfavorable controlling member.

Buy-Sell Provisions

Buy-sell provisions establish the terms for mandatory or optional purchases and sales of membership interests when certain trigger events occur. Common triggers include:

• Death or incapacity of a member
• Divorce of a member
• Bankruptcy of a member
• Termination of employment (for employee-members)
• Irreconcilable disagreements among the members (deadlock)

Two specific types of buy-sell provisions deserve special attention:

• Put rights: Allow a member to require the LLC (or other members) to purchase their interests when certain conditions are met
• Call rights: Allow the LLC (or other members) to require a member to sell their interests back under specified circumstances

Valuation is the most critical element of any buy-sell provision. The operating agreement should establish a clear methodology for determining the price of the interests being transferred, such as a fixed formula, an independent appraisal, or agreement of the parties. Ambiguous or missing valuation terms can lead to costly disputes at exactly the moment when the members’ interests are most likely to be at odds.

Fiduciary Duties and Indemnification

Fiduciary duties and indemnification provisions are among the most consequential sections of any operating agreement. They define the standard of conduct expected of managers and members, and they determine who bears the financial risk when things go wrong.

Understanding Fiduciary Duties in LLCs

Fiduciary duties are the legal obligations that managers and, in some cases, members owe to the LLC and to each other. The two primary fiduciary duties are:

• Duty of care: The obligation to make informed, careful decisions in the best interests of the company
• Duty of loyalty: The obligation to put the company’s interests ahead of personal interests and to avoid conflicts of interest

One of the most significant advantages of the LLC structure is the ability to modify or even waive fiduciary duties through the operating agreement. Many states, including Delaware (a popular state for LLC formation), allow members to eliminate the duty of care and the duty of loyalty through their operating agreement. This flexibility is much greater than what is available in the corporate context, where fiduciary duties are generally more rigid.

However, the ability to waive fiduciary duties should be exercised carefully. While majority members and managers may want broad waivers to provide maximum flexibility in operating the business, minority members should negotiate to retain at least a minimum standard of good faith and fair dealing to protect their interests.

Indemnification and Advancement of Expenses

Indemnification provisions protect managers, officers, and sometimes members from personal liability for actions taken in connection with the LLC’s business. A typical indemnification provision covers losses, damages, expenses (including legal fees), judgments, and settlements arising from the indemnified person’s role with the company.

Most operating agreements indemnify covered persons “to the fullest extent permitted by law,” which provides the broadest possible protection. However, indemnification is usually not available for actions involving fraud, willful misconduct, or bad faith.

Advancement of expenses is a related but distinct concept. While indemnification reimburses a person for losses after they are incurred, advancement provides funds upfront (typically for legal defense costs) before the final outcome of a matter is determined. Advancement provisions are especially important for managers and officers who might face personal lawsuits in connection with their roles.

Non-Compete and Non-Solicitation Provisions

Operating agreements sometimes include restrictions on members’ ability to compete with the LLC or solicit its employees and customers. These provisions are particularly important when members have access to the company’s trade secrets, customer relationships, or proprietary business methods.

Non-compete enforceability varies significantly by state, and any such provision must comply with applicable state and federal law. The Federal Trade Commission has been evaluating non-compete agreements at the federal level, though the legal landscape continues to evolve. Business owners should work with experienced legal counsel to ensure any non-compete provisions in their operating agreement are properly drafted and enforceable in their jurisdiction.

Dissolution and Winding Up

Every operating agreement should include provisions governing how and when the LLC can be dissolved and what happens to its assets when it winds down. While no one starts a business planning for its end, having clear dissolution procedures can prevent chaos if the time comes.

Events Triggering Dissolution

Common dissolution triggers include:

• Expiration of a specified term set forth in the operating agreement
• Written consent of all members or a supermajority of members
• A court-ordered judicial dissolution
• The sale of all or substantially all of the company’s assets
• Certain events affecting the last remaining member (if not addressed by other provisions)

The Winding-Up Process

Once dissolution is triggered, the LLC enters the winding-up phase. During this period, the manager (or a designated person) is authorized to:

• Settle and resolve all of the company’s liabilities and obligations
• Liquidate the company’s assets
• Distribute remaining proceeds to the members

The order of priority for distributing proceeds upon winding up is critical. Creditors are always paid first, followed by distributions to members. The distributions to members can be made either in accordance with positive capital account balances or according to the distribution waterfall. If the operating agreement uses both capital account balances and a waterfall, the drafters must ensure these two methods produce the same result. Inconsistencies between the two can lead to unexpected and unfavorable outcomes for some members.

Deadlock Provisions

In companies with equal ownership (such as 50/50 joint ventures), deadlocks can paralyze decision-making. Operating agreements for these types of companies often include specific mechanisms for breaking deadlocks, such as:

• Escalation to senior decision-makers within each member’s organization
• Mediation or binding arbitration
• Referral to an independent third party with industry expertise
• Buy-sell mechanisms (often called “shotgun” or “Russian roulette” provisions) that allow either member to force a buyout

Oklahoma-Specific Considerations for LLC Operating Agreements

While the core principles of LLC operating agreements apply across the United States, Oklahoma has its own statutory framework and business environment that create unique considerations for business owners in the state.

Oklahoma’s LLC Statute

Oklahoma’s Limited Liability Company Act, codified in Title 18 of the Oklahoma Statutes, governs the formation and operation of LLCs in the state. The Act expressly prioritizes the principle of freedom of contract and the enforceability of operating agreements, giving Oklahoma LLC members significant flexibility to customize their arrangements.

Key Considerations:

• Default to Oklahoma Statutes: If LLC members fail to enter into an operating agreement to determine their own LLC structure, the default rules of the Oklahoma Limited Liability Company Act will step in to dictate how the company operates.
• Binding Effect: Under Oklahoma law, an LLC and its members are bound by the operating agreement regardless of whether every member has formally signed it. This means oral or implied agreements may be enforceable, though relying on anything other than a clear written document is risky.
• Amendment Provisions: If the operating agreement does not specify how it can be amended, Oklahoma law provides that amendments require approval of members holding a majority of the membership interest entitled to vote.

Fiduciary Duties Under Oklahoma Law

Oklahoma’s LLC Act imposes default fiduciary duties on managers, requiring them to act in good faith, with ordinary prudence, and in the best interests of the company. Managers must also account to the LLC for any profits or benefits derived from the company’s business without the informed consent of the members.

However, Oklahoma law allows these duties to be modified or limited by the articles of organization or operating agreement. This gives members contractual freedom to customize the fiduciary obligations each party owes, which can be particularly valuable in complex business arrangements.

Oklahoma’s Business-Friendly Environment

Oklahoma consistently ranks as one of the most business-friendly states in the nation. The U.S. Chamber of Commerce has recognized the state for its low cost of living, favorable tax environment, and strong short-term job growth. With over 362,000 small businesses employing more than half the state’s workforce, Oklahoma’s LLC formation landscape is robust and growing.

For business owners in the Oklahoma City metro area and beyond, this environment creates particular advantages:

• Low formation costs: Filing fees for articles of organization are among the most reasonable in the country
• Annual compliance: Oklahoma requires a simple annual certificate filing with a $25 fee
• Series LLC availability: Oklahoma is one of the states that allows the creation of “series” LLCs, which can establish separate series of members, managers, and assets with distinct rights and liabilities within a single LLC entity – see our Guide to Series LLCs for more information
• Strong court system: Oklahoma’s courts have a solid track record of enforcing operating agreement provisions and respecting the freedom of contract principle

Oklahoma Tax Considerations for LLCs

Oklahoma LLCs that are taxed as partnerships are subject to the state’s pass-through tax framework. Members report their share of LLC income on their Oklahoma individual income tax returns. The state’s top individual income tax rate is currently 4.75%, which is relatively competitive compared to many other states.

When drafting operating agreements for Oklahoma LLCs, business owners should consider:

• State tax distribution provisions to cover Oklahoma income tax liability on allocated profits
• Multi-state filing obligations if the LLC operates in multiple states
• The interaction between federal and state tax treatment of LLC income and deductions

Common Operating Agreement Mistakes to Avoid

Even experienced business owners can make costly mistakes when drafting or negotiating their LLC operating agreements. Here are the most common pitfalls and how to avoid them.

Using a Generic Template Without Customization

Free templates available online can be a starting point, but they almost never address the specific needs of your business. A template designed for a single-member consulting LLC will not work for a multi-member manufacturing joint venture. Every operating agreement should be tailored to the company’s unique circumstances, including its industry, ownership structure, and growth plans.

Failing to Address Member Exits

One of the most common oversights is not planning for what happens when a member wants to leave or needs to be removed. Without clear buyout procedures, valuation methods, and payment terms, a member departure can trigger expensive litigation and potentially destabilize the business.

Ignoring Tax Implications

Operating agreement provisions have significant tax consequences. Allocation provisions that are not drafted in compliance with federal partnership tax rules can be disregarded by the IRS, resulting in unexpected tax liabilities. Tax distributions that are inadequate or poorly structured can leave members with tax bills they cannot pay. Always involve a qualified tax advisor in the drafting process.

Relying on Default State Law

State default rules rarely align with the members’ actual intentions. For example, Oklahoma’s default rule provides that members vote in proportion to their capital contributions. If that is not the arrangement the members agreed to, a written operating agreement that specifies the actual voting arrangement is essential.

Neglecting Minority Protections

Minority members who do not negotiate for appropriate protections (such as supermajority voting requirements, anti-dilution provisions, or tag-along rights) may find themselves at the mercy of the majority member. The time to negotiate these protections is during the formation of the LLC, when all parties are most motivated to reach agreement.

Not Keeping the Agreement Current

An operating agreement is not a “set it and forget it” document. As the business evolves, including changes in membership, business activities, tax laws, or strategic direction, the operating agreement should be reviewed and updated to reflect current circumstances. Regular reviews (at least annually) help ensure the agreement continues to serve the company’s needs.

Preemptive Rights: Protecting Against Dilution

Preemptive rights are an important protection for existing members, especially in growing companies that may need to raise additional capital through new membership interest issuances.

When a company issues new membership interests (whether to new investors, employees, or strategic partners), existing members’ ownership percentages are diluted. Preemptive rights give existing members the opportunity to purchase their pro rata share of any new issuance, allowing them to maintain their current ownership percentage.

Key considerations for preemptive rights provisions include:

• Scope: Which issuances trigger preemptive rights? Typically, employee equity grants, management incentive awards, and issuances in connection with acquisitions are excluded.
• Exercise period: How long do members have to decide whether to exercise their preemptive rights? Common periods range from 15 to 30 days.
• Over-allotment rights: If some members choose not to exercise their preemptive rights, can other members purchase the unsubscribed interests?
• Expiration: Do preemptive rights expire after certain events (such as an IPO) or when a member’s ownership drops below a specified threshold?

Books, Records, and Information Rights

Access to accurate financial information is essential for members to make informed decisions about their investment. The operating agreement should require the manager to maintain comprehensive books and records and grant members the right to inspect and copy those records.

Beyond basic inspection rights, many operating agreements grant “information rights” that require the company to proactively distribute financial information to members, such as quarterly financial statements, annual audited statements, and tax reporting information. These provisions are particularly important for passive investors who are not involved in day-to-day management.

Getting Professional Help with Your Operating Agreement

An LLC operating agreement is one of the most important documents your business will ever have. It defines the relationships among the members, establishes the rules for running the company, and provides the framework for resolving disputes. Getting it right requires a combination of legal expertise, business acumen, and an understanding of each member’s goals and concerns.

When to Involve an Attorney

While simple single-member LLCs may be able to start with a basic agreement, any LLC with multiple members, significant assets, or complex ownership arrangements should work with experienced business counsel. Specific situations that demand professional guidance include:

• Multi-member LLCs with different contribution levels or ownership percentages
• LLCs with investor members who are not involved in management
• Joint ventures between two or more businesses
• Companies planning to issue equity to employees
• Businesses in regulated industries
• LLCs with significant real estate, intellectual property, or other complex assets

What to Look for in an LLC Attorney

Not all attorneys are equally equipped to handle LLC operating agreements. Look for counsel who:

• Has specific experience drafting and negotiating operating agreements
• Understands the tax implications of LLC structuring
• Can explain complex legal concepts in plain language
• Has experience with businesses in your industry
• Takes the time to understand your specific business goals and concerns

Frequently Asked Questions About LLC Operating Agreements

• Is an operating agreement required for my Oklahoma LLC?

  No, Oklahoma does not legally require an LLC to have an operating agreement. However, having one is strongly recommended. Without an operating agreement, your LLC is governed by the default rules of the Oklahoma Limited Liability Company Act, which may not reflect your intended business arrangements. Banks, lenders, and investors will also typically require one before doing business with you.

• Can a single-member LLC benefit from an operating agreement?

  Absolutely. A single-member operating agreement reinforces the legal separation between you and your business, which is critical for maintaining your personal liability protection. It also provides a clear governance record if you ever need to bring in partners, seek financing, or respond to legal or tax inquiries.

• What is the difference between member-managed and manager-managed LLCs?

  In a member-managed LLC, all members participate in management and can bind the company in business dealings. In a manager-managed LLC, one or more designated managers handle day-to-day operations while the other members act as passive owners. The right choice depends on the size of your company, the number of members, and whether all members want to be actively involved in running the business.

• How are profits and losses divided in an LLC?

  Profits and losses can be divided in any manner the members agree to in the operating agreement. Common approaches include dividing proportionally to ownership percentages, proportionally to capital contributions, or according to a negotiated formula. Without an operating agreement, Oklahoma law defaults to dividing profits and losses in proportion to members’ capital contributions.

• Can I change my operating agreement after it is signed?

  Yes, operating agreements can be amended. The agreement itself should specify the process for amendments, including what vote is required. Under Oklahoma law, if the operating agreement is silent on amendments, changes require approval of members holding a majority of the membership interest entitled to vote.

• What happens if a member wants to leave the LLC?

  The answer depends on what your operating agreement provides. Well-drafted agreements include buy-sell provisions, rights of first refusal, or other transfer mechanisms that govern member departures. Without these provisions, resolving a member exit can become complicated and expensive.

• What are fiduciary duties and can they be waived in an LLC?

  Fiduciary duties are the legal obligations that managers and sometimes members owe to the company and each other, including the duty of care and the duty of loyalty. Many states, including Oklahoma, allow these duties to be modified or limited in the operating agreement. However, waivers should be carefully negotiated to balance the interests of managers and members.

• How much does it cost to have an attorney draft an operating agreement?

  Costs vary depending on the complexity of the arrangement. A straightforward single-member agreement will cost significantly less than a multi-member agreement with multiple classes of interests, complex distribution waterfalls, and detailed transfer provisions. However, the cost of professional guidance is almost always far less than the cost of resolving disputes that arise from a poorly drafted agreement.

Disclaimer: This article provides general information about LLC operating agreements and should not be considered specific legal or tax advice. Operating agreement requirements vary by state, and the specific terms of your agreement should be tailored to your unique business circumstances. For personalized guidance on your operating agreement needs, consult with qualified Oklahoma business attorneys and tax professionals.

About Cantrell Law Firm: We’re Oklahoma business attorneys who help entrepreneurs build strong legal foundations for long-term success. As former business owners ourselves, we understand the practical realities of running a company and bring that perspective to every operating agreement we draft. Our approach combines deep legal knowledge with real-world business experience to help clients protect their interests and position their businesses for growth. Contact us to discuss your LLC operating agreement needs.