How to Review an LLC Operating Agreement: A Clause-by-Clause Checklist

How do you review an LLC operating agreement? Review an LLC operating agreement by reading it clause by clause against a checklist, and by asking one question of every clause: if this company does well, or badly, or the members fall out, what does this sentence do to my money and my control? The clauses that matter most are ownership, allocations and distributions, management and voting, and transfer and buyout terms, so spend your time there. This checklist walks through each clause in the order it usually appears, with the red flags to catch. It is written for a member joining a new LLC or reviewing the agreement of one they are already in. This is general information, not legal advice. LLC law is set by each US state, so confirm the position in your state, and for anything beyond a simple company have an attorney review the agreement before you sign. ## 1. Formation and name - Does the agreement name the correct legal entity, state of formation and formation date?

• Does it match the public Articles of Organization or Certificate of Formation? Red flag: an agreement that names a different entity or state than the filing, which can undermine the whole document. ## 2. Members and ownership percentages - Is every member listed with their exact percentage interest, totaling 100%?
• Does your stated percentage match what you were promised? Red flag: percentages that do not add to 100, or an ownership split that differs from your verbal deal. Fix this before anything else, because it drives everything downstream. ## 3. Capital contributions - Is each member's contribution recorded: cash, property (with value), or services?
• Can you be required to put in more capital later, and on what terms? Red flag: an open-ended obligation to make further capital contributions on demand, or a majority's power to force you to contribute or be diluted. Know your maximum exposure. ## 4. Allocations and distributions - Are profits and losses allocated in proportion to ownership, or on some other basis?
• Who decides when cash is distributed, and are you guaranteed anything?
• Are there tax distributions to cover the tax on profits allocated to you? Red flag: profits allocated to you (so you owe tax on them) while the manager has sole discretion to withhold all distributions, leaving you with a tax bill and no cash. A tax-distribution clause protects against this. ## 5. Management structure - Is the LLC member-managed or manager-managed, and does that match what you expected?
• If manager-managed, what are the limits on the manager's authority? Red flag (passive member): a manager with broad, unchecked power to spend, borrow and contract. Red flag (active member): a structure that sidelines you from decisions you expected to share. ## 6. Voting and major decisions - Does each member vote in proportion to their interest, or one vote each?
• Which decisions need a supermajority or unanimity (new members, selling assets, big debt, amendments, dissolution)? Red flag: a majority that can amend the agreement, admit new members or sell the business without any minority protection. As a minority member, make sure the decisions that affect your stake need your consent. ## 7. Transfer of interests - Can a member sell or pledge their interest freely, or is consent required?
• Is there a right of first refusal for the other members? Red flag: free transferability that lets a co-member sell to an outsider you do not know, or terms that let others transfer freely while you are locked in. ## 8. Admission, withdrawal and buyout - Can you exit, and how is your interest valued when you leave?
• Is the buyout price a clear formula or fair market value, and are the payment terms reasonable? Red flag: no exit right at all, or a buyout price set by the remaining members with no formula, which lets them pay you a token amount. Pin down the valuation method now. ## 9. Death, disability and dissolution of a member - What happens to your interest if you die or become disabled?
• Does the company or the other members have a buy option, and at what price? Red flag: a clause that lets the company buy a deceased member's interest from their family at an unfairly low fixed price. ## 10. Dissolution and winding up - What events trigger dissolution, and what vote is needed?
• Is the distribution waterfall clear: creditors, then capital accounts, then owners by interest? Red flag: a vague or missing waterfall, which causes a fight exactly when the company is being wound up. ## 11. Indemnification and fiduciary duties - Are members and the manager indemnified only for good-faith acts, not misconduct?
• Does the agreement waive or limit fiduciary duties (some states allow this)? Red flag: a broad waiver of the manager's fiduciary duties combined with wide indemnification, which can leave you no remedy if the manager acts against the company's interest. ## 12. Governing law and disputes - Is the governing state law stated, and is any dispute forum (court or arbitration) one you can realistically use? Red flag: disputes sent to a distant state or to costly arbitration that makes any small claim impractical. ## A fast triage If you only have ten minutes, read four things: your ownership percentage (clause 2), the allocations and distributions terms including tax distributions (clause 4), the voting thresholds for major decisions (clause 6), and the buyout price method (clause 8). That is where your money and your control live. ## Where a contract workspace helps Reviewing one LLC operating agreement by hand is doable. Keeping it up the same way for every agreement, and then holding the capital obligations, voting thresholds, buyout formulas and amendment history in order as members join and leave, is the part that wears people down. The useful idea here is that drafting, reviewing, tracking and governing operating agreements can sit in one AI workspace tuned to how your company runs its LLCs, instead of a word processor for drafts, a spreadsheet for terms and a shared drive for versions. Adira is built as one such workspace.