LLC Operating Agreement

A Limited Liability Company (LLC) is one of the most popular business structures in New York, and for good reason: it combines the liability protection of a corporation with the simpler, pass-through taxation typically associated with a partnership or sole proprietorship. But that flexibility comes with a catch — much of what makes an LLC work well depends on a document many business owners skip entirely: the operating agreement (often called an LLC membership agreement).  At Sharifov & Associates, PLLC, the business disputes that land in our office most often trace back to the same root cause. Clients come in with a conflict between LLC members or partners, and when we ask for the formation documents — specifically, the operating agreement — the answer is too often “we don’t have one.” Instead, the business was built on a handshake, a verbal understanding, or a vague sense of trust between partners. A consultation on LLC formation and operating agreement drafting, done before you launch — or at the very latest, early in your business’s life — can save you tens of thousands of dollars in litigation costs, not to mention the time, stress, and damaged relationships that come with a partnership dispute.

Why Do I Need an LLC Operating Agreement?

It’s always better to put a clear, concrete agreement in writing with your business partners before a venture gets underway — not after a disagreement forces the issue. A well-drafted operating agreement allows members to:

• Define each member’s capital contributions
• Outline each member’s duties, rights, and responsibilities
• Clarify ownership interest (membership interest) and how profits and losses will be shared
• Establish who serves as the managing member
• Determine who has signing authority over the company’s bank accounts and finances

Beyond the basics, the agreement should specify which decisions require unanimous member consent. These “major decisions” commonly include:

• Selling, leasing, assigning, or otherwise transferring all or substantially all of the company’s assets
• Borrowing money on behalf of the company above a specified dollar threshold
• Lending company funds or assets to any person above a specified value
• Confessing judgment against the company, or settling, compromising, releasing, or paying any claim or debt above a set amount (including insurance claims)
• Approving a merger or consolidation with another company, corporation, partnership, or entity
• Changing the fundamental nature or character of the company’s business
• Entering into transactions outside the ordinary course of business, including assignment of the company’s rights in specific property
• Requiring or making additional capital contributions beyond what the agreement already provides for

This list is illustrative, not exhaustive — every LLC’s needs are different. The business attorneys at Sharifov & Associates can help tailor provisions that fit your specific venture and that all members will actually agree to.

What If I Want to Sell My Share in an LLC?

Unlike shares of a publicly traded corporation, LLC membership interests can’t be bought or sold through a brokerage account. Selling your stake in an LLC is a more deliberate process — and without the right provisions in your operating agreement, it can become a serious point of conflict.

To transfer your interest, you generally need:

1. A qualified buyer, and
2. Consent from the other members to admit that buyer as a new member

This raises real practical questions. What if the remaining members don’t want an outsider involved in management? They might be open to a silent investor but unwilling to share managerial control. Resolving these questions after a sale offer is on the table is exactly how members end up in litigation.

The solution is to build the transfer mechanism into the operating agreement from the outset. The most common protective tool is a right of first refusal (ROFR): if a member receives a bona fide offer to purchase their interest, they must first notify the other members. Those members then have the option — usually within a defined window (commonly 30 days from notice) — to purchase the departing member’s interest themselves, on the same terms offered by the third party, typically in proportion to their existing ownership stakes.

A right of first refusal protects everyone: the departing member retains the ability to exit and realize value, while the remaining members retain control over who joins the company. Many agreements pair this with a requirement that new members be admitted only by unanimous consent.

How Do I Dissolve an LLC?

Dissolution provisions are another essential — and often overlooked — piece of any operating agreement. Under New York law, an LLC is typically dissolved upon:

• The unanimous consent of all members, or
• The occurrence of a withdrawal event with respect to a member, where the remaining members do not elect to continue the business

A withdrawal event can include a member’s death, retirement, withdrawal, expulsion, bankruptcy, insolvency, or any other event that terminates that member’s continued membership under New York law.

It’s also worth noting that an LLC member doesn’t have to be an individual. Another LLC — or a corporation — can hold a membership interest, including as a managing member. This is common in layered investment structures. For example, in a multifamily real estate investment, several individual investors might pool capital into one LLC, which in turn becomes a member of a second LLC managed by an operating partner responsible for day-to-day management. That second LLC may, in turn, be the sole member of a third LLC that actually holds title to the property. These layered structures are typically used to streamline lending, accounting, and tax treatment — but they make a precise, well-drafted operating agreement even more important, since each layer needs its own clear governance.

Frequently Asked Questions

Is an LLC operating agreement legally required in New York? New York is one of the few states that legally requires LLCs to adopt a written operating agreement, within 90 days of filing the Articles of Organization. Even in states where it isn’t mandatory, skipping one leaves your business governed by default state law instead of your own terms.

What’s the difference between an “LLC membership agreement” and an “operating agreement”? They generally refer to the same document. “Operating agreement” is the formal legal term used in New York LLC Law; “LLC membership agreement” is a common informal name for the same thing.

Can a single-member LLC skip the operating agreement? No. Even single-member LLCs benefit from an operating agreement — it helps preserve the liability shield between the owner and the business, and it’s often required by banks, lenders, or title companies.

How much does it cost to draft an LLC operating agreement? Costs vary based on the complexity of the ownership structure, the number of members, and whether the LLC involves layered entities (such as investment or real estate holding structures). Sharifov & Associates offers consultations to scope this based on your specific business.

Don’t Wait for a Dispute to Find Out You Need an Agreement

An operating agreement isn’t paperwork you fill out as an afterthought — it’s the document that determines how disputes get resolved before they happen. Whether you’re forming a new LLC, bringing on a new member, planning to sell your interest, or structuring a multi-layer investment entity, the right agreement, drafted up front, is far cheaper than the litigation that follows when one doesn’t exist. If you need help drafting, reviewing, or negotiating an LLC operating agreement, contact Sharifov & Associates today to schedule a consultation with our New York business attorneys.

This article is for general informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Sharifov & Associates, PLLC.