LLC Operating Agreement: What to Put in Writing When Two People Share a Business

What an operating agreement actually covers

The operating agreement is the governing document for a multi-member LLC. It answers the questions that come up the moment the business grows past its early days — or the moment partners stop agreeing on everything:

• Ownership percentages: Who owns what share of the LLC, expressed as membership interest (e.g., 60% / 40%, not necessarily equal)
• Profit and loss allocation: How income and losses are divided among members — this doesn’t have to match ownership percentages, but the IRS requires it to have substantial economic effect
• Capital accounts: A running tally of each member’s investment and accumulated earnings, used to determine what each partner gets if the LLC is liquidated
• Distributions: When and how cash is distributed to members, and whether it can be withheld to fund the business
• Management authority: Who can sign contracts, open bank accounts, hire employees, and make binding decisions — and whether any decisions require unanimous consent
• Transfer restrictions: Whether a member can sell or give away their interest, and whether remaining members have the right of first refusal
• Buyout provisions: What happens when a member wants out — how the interest is valued, how the buyout is funded, and over what timeline
• Dissolution events: What triggers the end of the LLC — death, disability, bankruptcy, or voluntary withdrawal — and what happens next

When contributions aren’t equal

Most new business partners start with a handshake understanding: “we both own half, we split everything down the middle.” That works until it doesn’t. Common situations where equal-split assumptions break down:

• One partner provides most or all of the startup capital
• One partner is doing the day-to-day work; the other is more of a silent investor or passive contributor
• The labor and time contributions shift over time as the business grows
• One partner brings existing customers, equipment, or intellectual property

None of these situations are unusual — they’re the norm. The operating agreement is where they get resolved before they become disputes.

Protecting the partner who’s doing more of the work

When one partner is running the business day-to-day — handling the operations, the customers, the buying, the logistics — there are two mechanisms to compensate them appropriately:

Guaranteed payments are amounts paid to a partner for their services, set by the operating agreement, regardless of whether the business is profitable. They function like a salary: the partnership deducts them as a business expense, and the recipient pays ordinary income tax and self-employment tax on them. This is the clearest way to compensate a working partner for their labor independent of profit.

Adjusted profit allocationis another option — instead of paying the working partner a guaranteed amount, you allocate a larger share of profits to reflect their operational role. For example, 60/40 instead of 50/50. This is simpler but ties the working partner’s compensation entirely to profitability.

Either approach requires documentation in the operating agreement. Without it, both partners receive the same treatment regardless of contribution.

Capital contributions and what happens when one partner invests more

Capital contributions — the money or assets each partner puts into the LLC at formation — are tracked in each member’s capital account. If Partner A puts in $15,000 and Partner B puts in $3,000, those amounts should appear in the operating agreement.

What matters about capital accounts beyond the initial contribution:

• Profits allocated to a member increase their capital account
• Distributions taken by a member decrease their capital account
• Losses allocated to a member decrease their capital account
• On dissolution, members are paid out according to their capital account balance — not necessarily their ownership percentage

This means the operating agreement’s capital account provisions directly affect who gets what if the LLC ever winds down. An equal-ownership LLC where one partner invested three times as much could still leave that partner shortchanged at liquidation without the right capital account structure.

Buyout provisions: the clause everyone skips

When new business partners draft an operating agreement, they almost always focus on how things work when the business is going well. The provisions that get skipped are the ones for when they don’t.

A buyout provision — sometimes called a buy-sell agreement — addresses:

• Triggering events: When the buyout mechanism kicks in — voluntary withdrawal, death, disability, divorce, bankruptcy, or failure to perform
• Valuation method: How the departing partner’s interest is valued — a fixed formula, an independent appraisal, or a negotiated price
• Payment terms: Whether the buyout happens in a lump sum or over time, and what happens if the remaining partner can’t fund it
• Right of first refusal: Whether remaining members have the right to buy the interest before it can be sold to an outside party

A buyout provision written on day one, when everyone is aligned, costs almost nothing. Written after a dispute starts, it’s a negotiation under pressure — and often ends in litigation or forced dissolution.

What California defaults to without a written agreement

If a multi-member LLC has no operating agreement — or has one that doesn’t address a particular situation — California’s Revised Uniform Limited Liability Company Act (RULLCA) fills the gaps. The defaults include:

• Profits and losses are allocated in proportion to the value of each member’s contributions
• All members have equal management rights unless otherwise agreed
• Ordinary decisions require a majority-in-interest vote; extraordinary decisions (selling all assets, amending the articles, dissolving the LLC) require unanimous consent
• A member who dissociates from the LLC does not automatically get bought out — the LLC continues and the departing member retains their economic rights

These defaults are rarely what the partners intended. Most partners expect that if someone wants out, there’s a way out — and a buyout. The statute doesn’t guarantee that.

Getting it done

For a straightforward two-member LLC with equal contributions and equal roles, a reviewed template may be sufficient. When contributions are unequal — one partner putting in more capital, one doing more of the work, different expectations about how profits will be paid out — the operating agreement warrants more attention and professional drafting.

The questions to answer before drafting:

• What did each partner actually contribute — cash, equipment, existing customers, labor?
• Who will run the business day-to-day, and how will they be compensated for that beyond their ownership share?
• What happens if one partner wants out in year two?
• What happens if the business needs more capital — are both partners expected to contribute equally?
• Who can make binding decisions without the other partner’s approval?

Answering these questions in writing, at formation, is the difference between a business structure that protects both partners and one that relies on an assumption of goodwill that may not last.