“We Have an Operating Agreement… Somewhere”
The document you signed years ago may be the most dangerous thing in your business
Most LLC owners have one. Most haven’t read it since the year they formed the company.
It’s sitting in a folder somewhere along with the articles of organization and other formation documents that felt important at the time and have been ignored ever since.
That agreement probably made sense when you signed it. The ownership split reflected the deal. The exit provisions seemed fine, maybe because nobody was seriously thinking about exit.
That was years ago. The business has changed. The people have changed. The agreement almost certainly hasn’t.
This is where it gets expensive.
The Document Is a Contract. Treat It Like One.
Your operating agreement is a legal contract among the owners of your business. It governs how decisions get made, how profits flow, what happens when someone wants out, and what happens when owners can’t agree.
Like any contract, it means what it says — not what you remember discussing, not what you intended, not what everyone understood at the time. What it says.
And if what it says is years out of date, or silent on questions that have since become live ones, or built around an ownership structure that no longer reflects reality — you have a problem. You just don’t know it yet.
Most business owners find out in one of three ways: a co-owner dies, a co-owner wants to leave, or the co-owners stop agreeing on something that matters. None of those are good times to discover the governing document is inadequate.
Outdated Ownership Terms
Here’s a pattern that comes up constantly.
Two or three founders sign an operating agreement reflecting their initial ownership split. Over the years, the economics shift. One partner contributes significantly more capital. Another steps back from day-to-day operations but stays on as an owner. A key employee is promised equity and receives it informally — maybe through an email or a handshake — without any amendment to the operating agreement.
Now the document says something different from what the parties actually believe the arrangement to be.
When things are going well, that gap is invisible. Everyone knows the real deal, and nobody bothers to formalize it. But when things stop going well — when a buyout conversation starts, when a lender asks for documentation, when a new investor does due diligence, when an owner dies and their estate tries to figure out what they owned — the document controls.
Or it creates enough ambiguity that the dispute resolution is expensive, slow, and unpredictable.
The informal promises don’t disappear when the agreement says something different. They become claims. And claims require litigation to resolve.
The Deadlock Problem
Most people assume deadlock is a 50/50 ownership problem. It’s not.
Even when one member holds a clear majority, operating agreements frequently require unanimous or supermajority consent for major decisions — selling the company, taking on significant debt, admitting a new member, making a large capital expenditure. Those clauses make sense when everyone is aligned. When they’re not, a minority owner suddenly has veto power over decisions that matter, regardless of what the ownership percentages say.
So you can own 70% of the business and still be stuck.
The moment owners stop agreeing on something material — whether to take on a large contract, whether to sell, how to handle a key employee — you can have a genuine deadlock with no mechanism to break it. Some agreements address this. Many don’t. And the ones that do often rely on mechanisms nobody has thought through: mediation before litigation (useful, but it doesn’t resolve the underlying impasse), or a forced buyout trigger (fine in theory, but at what price, on what timeline, with what financing terms?).
In many states, a genuine deadlock in a closely held LLC can lead to judicial dissolution — a court ordering the business wound up. You’d generally rather have a private resolution mechanism than leave that outcome on the table.
Exit Gaps
Most operating agreements have transfer restrictions — provisions limiting a member’s ability to sell or transfer their ownership interest without the consent of the other members. That’s typically a good thing. You don’t want your business partner’s creditor or ex-spouse becoming your new co-owner.
What they often lack is a workable exit path.
What happens when a member wants to leave and the others can’t or won’t buy them out? What happens when the departing member thinks their interest is worth $X and the remaining members think it’s worth half that? What happens when a member dies — does the estate stay in the business, or does it have to sell, to whom, on what timeline, at what price?
If those questions weren’t answered when the agreement was drafted — or were answered in a way that no longer fits — the gap exists whether or not anyone has noticed yet.
What to Actually Do
Pull out your operating agreement. If you can’t find it, that’s its own problem — try your formation attorney, or whoever prepared it originally.
In family businesses especially, there’s pressure not to formalize things because formalizing feels like distrust. It isn’t. The operating agreement is the document that lets you have the difficult conversation now, when nobody is under pressure, rather than later, when everyone is.
Then read it with these questions in mind: Does the ownership structure reflect current reality? Is there a workable mechanism for what happens when an owner wants to leave? Is there a way to break a deadlock — not just for a 50/50 split, but for any decision requiring unanimous or supermajority consent? Is there a buyout process with a valuation method, a timeline, a funding mechanism?
If the answer to any of those is “I’m not sure” or “we never really addressed that” — that’s your signal.
Here’s where it gets nuanced. An operating agreement isn’t a fill-in-the-blank exercise. The questions it has to answer — how do you value a departing member’s interest, what triggers a forced buyout, how do you break a tie without blowing up the business — don’t have standard answers. They have answers that are right for your business, your ownership structure, and your relationships. Vague language is often worse than a gap, because it creates disputes about what was meant rather than a predictable state-law default.
Tax law adds another layer. Changes in how LLCs are taxed — distributions, entity classification, buyout treatment — can affect whether your agreement is still working the way it was intended. An agreement drafted under one tax environment may need to be revisited when the rules change. That’s not a reason to panic, but it’s a reason for periodic review, not just crisis-driven attention.
The good news: amending an operating agreement when all members are willing and things are going well is not a complicated or expensive exercise. The expensive part is trying to reconstruct what everyone intended after the relationship has broken down.
Same pattern as every week in this series. The risk isn’t the dramatic failure. It’s the quiet accumulation — an arrangement that looked fine on the surface, built on a document nobody has read in years.
Mike Lang is a transactional lawyer who writes weekly for founders and family business owners navigating the deals that define their companies. Questions or topics you want covered? Reply to this email.