An operating agreement checkup is a review of your LLC’s governing contract to confirm it still matches who owns the company, how decisions get made, and what happens when an owner leaves, dies or disagrees. The most important areas are buy-sell terms, deadlock resolution, transfer restrictions, distributions, and death or disability provisions. Most LLCs should review their agreement every few years and after any major ownership or business change.
Many companies with $1 million to $5 million in revenue still run on the agreement they signed at formation. That document was often a template, written when the business was smaller and the owners hadn’t thought through a breakup. Here’s what to look at.
Why an operating agreement checkup matters
The operating agreement is the contract among the owners of an LLC. When it’s silent, your state’s LLC statute fills in the gaps. Those default rules vary by state and often surprise owners.
Distributions are a good example. Under the Revised Uniform Limited Liability Company Act, which a number of states have adopted, distributions before dissolution are made in equal shares among members unless the agreement says otherwise. Delaware’s default is different: it allocates distributions by the agreed value of each member’s contributions. Two owners who invested very different amounts could be split 50/50 by default in some states.
A checkup catches those gaps before they become disputes.
What to review in your operating agreement
Ownership and capital
Start with the basics:
- Does the agreement list the current members and their percentages?
- Does it match your tax returns and K-1s?
- Does it say what happens if more capital is needed? Can members be required to contribute? What happens to a member who doesn’t?
- If anyone holds profits interests or equity incentives, are they documented?
Mismatches between the agreement, the cap table and the tax filings are common and easy to fix now. They’re harder to fix during a sale or dispute.
Management and decision-making
Confirm whether the LLC is member-managed or manager-managed and that the agreement reflects how you actually operate. Then look at:
- Authority. Who can sign contracts, open accounts, hire and borrow?
- Major decisions. Which decisions require a majority, a supermajority, or unanimous consent? Common examples include selling the company, admitting new members, taking on significant debt, and changing the business.
- Officers. If you use titles like CEO or president, does the agreement give them defined authority?
Distributions and tax provisions
Review how and when profits are paid out:
- Distribution priorities. Do any members get a return of capital or preferred return first?
- Tax distributions. Does the agreement require distributions to cover members’ tax bills on allocated income? Without one, a member can owe tax on profits they never received.
- Reserves. Can managers hold back cash for operations before distributing?
If your LLC is taxed as a partnership, check the tax provisions too. The federal partnership audit regime requires a partnership representative with authority to bind the company in an IRS audit. The agreement should say who that is, how they’re replaced, and what they must tell other members. Some partnerships with 100 or fewer eligible partners can elect out of the regime each year. Partners like trusts, partnerships and certain disregarded entities can make an LLC ineligible.
Buy-sell provisions
Buy-sell terms decide what happens when an owner exits. They’re often the most valuable part of the agreement and the part most often left vague. A complete buy-sell provision addresses:
- Triggering events. Death, disability, retirement, termination of employment, divorce, bankruptcy, a breach of the agreement, or a desire to sell.
- Who buys. Whether the company, the other members, or both have the right or obligation to purchase.
- Valuation. A fixed price updated yearly, a formula, or an independent appraisal. Fixed prices go stale fast if nobody updates them.
- Payment terms. Lump sum or installments, interest rate, security, and whether payments are subordinate to bank debt.
- Funding. Whether life or disability insurance funds the buyout.
Deadlock provisions
Two 50/50 owners who disagree can freeze a company. Deadlock clauses give the owners a way out short of court. Common approaches include:
- Escalation and mediation before anything else
- A tie-breaking vote by a trusted third party or independent manager
- A buy-sell “shotgun” clause, where one owner names a price and the other must buy or sell at that price
- Dissolution as a last resort
Without a deadlock mechanism, owners may have to ask a court to resolve the dispute or dissolve the company. That’s slow, expensive and public.
Transfer restrictions
Most owners want a say in who their co-owners are. Check whether the agreement:
- Requires consent before a member transfers an interest
- Gives the company or other members a right of first refusal
- Includes tag-along rights, so minority owners can join a sale, and drag-along rights, so a majority can deliver the whole company to a buyer
- Addresses transfers to family members, trusts or estate-planning entities
- Distinguishes between transferring economic rights and admitting a new voting member
Under many state LLC statutes, a person who receives an interest without being admitted as a member gets economic rights only, not voting or management rights. The agreement can change that, so check what yours says.
Death and disability provisions
These are the provisions owners least like to think about. They matter most to the families involved.
Under the default rules in many states, a member who dies is dissociated. The estate typically holds only the economic rights in the interest, not the right to vote or manage. That can leave a surviving spouse with a share of profits and no say, and the remaining owners with a co-owner they didn’t choose.
A good agreement answers:
- Must the company or members buy a deceased member’s interest, or is it optional?
- How is “disability” defined, and who decides? A defined period of inability to work is common.
- How is the interest valued at that point, and how is the purchase funded?
- Who manages the company if a managing member dies or becomes incapacitated?
Coordinate these terms with each owner’s estate plan.
When to update your operating agreement
Schedule a review when any of these happens:
- An owner joins, leaves or changes their percentage
- A significant new capital contribution or loan from an owner
- A change in tax classification, such as electing S corporation status
- Bringing in investors or new lenders whose terms affect governance
- A key owner’s life change, such as marriage, divorce, retirement or a health issue
- Moving or expanding into another state
- Preparing for a sale, since buyers review governance documents in due diligence
If none of these has happened, a review every two to three years is still worthwhile.
One compliance update: beneficial ownership reporting
Many LLC owners spent 2024 preparing Corporate Transparency Act filings. In August 2026, FinCEN issued a final rule, effective August 14, 2026, that permanently ends beneficial ownership reporting for U.S. companies and U.S. persons. Foreign companies registered to do business in the U.S. still have reporting obligations. Check FinCEN’s BOI page for current requirements.
Next steps
An operating agreement review usually fits within a few attorney hours. Gather your current agreement, any amendments, your cap table and your most recent K-1s. Then list the questions the owners have never quite settled.
If you’re planning an exit, our guide to preparing your business for sale covers what buyers look for. For other core documents, see our list of essential contracts for growing businesses, and compare subscription, hourly and in-house legal costs.
With our subscription, $1,997 a month covers up to 5 attorney hours on any business legal matter, including governance. You can see how the subscription is priced or start your subscription.
Frequently asked questions
What happens if my LLC doesn't have an operating agreement?
Your state’s LLC statute fills in the gaps with default rules. Those defaults may not match what the owners intended. For example, some states split distributions equally among members by default, regardless of how much each member invested.
How often should an LLC review its operating agreement?
A review every two to three years is a reasonable baseline, plus a review after any major event. Triggers include adding or losing an owner, a significant capital contribution, a change in tax status, taking on debt or investors, or preparing to sell.
What is a buy-sell provision in an operating agreement?
A buy-sell provision sets the rules for when an owner leaves, dies, becomes disabled or wants to sell. It defines which events trigger a buyout, who can or must buy, how the interest is valued, and how the price is paid. Without one, owners often end up negotiating at the worst possible time.
Do LLCs still have to file beneficial ownership reports?
Not if they’re U.S. companies. FinCEN issued a final rule effective August 14, 2026, that permanently exempts U.S. companies and U.S. persons from beneficial ownership reporting under the Corporate Transparency Act. Foreign companies registered to do business in the U.S. still have reporting obligations.
Can a single-member LLC benefit from an operating agreement?
Yes. A written agreement helps show the LLC is a separate entity, sets out who can act for the company, and can address what happens to the business if the owner dies or becomes incapacitated. It’s also easier to add an owner later if the framework is already in place.