Crafting an Operating Agreement That Gets You a Seat at the Table

The Bottom Line

• Minority members of limited liability companies should work to draft operating agreements that allow them more control within the agreements’ provisions.
• Creating a board of managers that includes minority members versus a single, majority manager will enable fairer decision-making.
• Bring in counsel early and draft governance provisions that ensure minority members have a voice in governance.

Passivity is a familiar stereotype of a limited liability company’s minority member, meaning a member who owns less than half the company. Minority members typically don’t participate in the management of the company, and their rights as a member are generally purely economic, including the right to receive distributions from the company.

The realization of these rights, however, depends on the majority soundly exercising its business judgment so the company turns a profit, then deciding to distribute that profit to members. If the majority member withholds distributions or wastes the company assets, contributing to an abuse of power, the minority would hope to be protected by a court against oppression by holding the majority to its fiduciary duties.

But court battles are protracted and expensive, and their outcomes are uncertain. Courts also have the ability to deny minority relief in operating agreements, which are the majority’s source of power. For instance, a minority claiming it hasn’t received distributions may be hamstrung by a provision in the operating agreement that allows the majority to decide whether to make distributions, and in what amount.

Minority members can avoid this circumstance by drafting provisions in the operating agreement that expressly give them a voice in matters deemed important. Several contractual governance provisions can increase and strengthen minority members’ legal rights.

Joint Managerial Authority

No law requires an LLC’s majority member to also be its sole manager. The operating agreement is a contract, and parties are free to strike their own bargain. In charting your course, you can create a board of managers comprised of both majority and minority members.

To avoid a deadlock, aim for a board with an odd number of managers, and require an affirmative vote from a majority of board managers to take corporate action.

Restricting Managerial Discretion

Operating agreements typically vest managers with a broad swath of control over regular course business decisions. This authority can be constrained by incorporating a provision that requires a unanimous member vote over certain material transactions. Approving these transactions thus requires more than the managers’ determination—a unanimous member vote is necessary. Examples of such transactions are:

• Increasing membership interests or admitting new members
• Contracts with certain third parties, including certain vendors
• Contracts over a certain dollar amount
• Contracts that take on debt above a certain level of indebtedness or that put the company’s indebtedness above a certain level
• Contracts made in contemplation of entering into new lines of business

Having all members vote on these transactions functions as the equivalent of giving minority members a veto rights over these transactions.

Limiting Capital Calls

Capital calls—formal requests for money from members—can be limited to funding the company’s operating expenses. To enforce this limitation, the operating agreement would require managers to provide a sworn certification regarding the use and need for the funds as part of the capital call notice. By limiting the scope and requiring certification, the majority would be hard pressed to come up with a reason for requesting large amounts of cash from the minority.

To prevent the majority constantly coming to you for cash, you can include a provision limiting the number of capital calls. For example, instituting a ceiling of one every two years adequately ensures you don’t become the company’s ATM.

If limits on number and scope aren’t enough to circumscribe calls for large amounts of capital, feel free to include a provision capping the amount of any capital call over a given period. The cap will depend on the nature of the business and what you anticipate for funding needs.

Capital calls also may be outright prohibited unless voted on by all members. However, consider here that managers are traditionally more attuned to a company’s financial needs. A provision that doesn’t give them discretion to call for capital at any time they deem appropriate may end up depriving the company of cash at times when it is most needed.

Assuming capital calls aren’t prohibited, a provision should be incorporated mandating that they’re funded by members in proportion to each member’s equity interest—that is, pro rata.

For example, think of a three-member LLC with the majority member holding 60% of the interests and the other two members each holding 20%. Were the 60% member, in their capacity as manager, to make a $1 million capital, it would be funded as follows: The 60% majority member contributes $600,000, one 20% member contributes $200,000, and the other 20% member contributes the remaining $200,000. These amounts are proportional to each member’s ownership interest in the company.

Mandating Distributions

The operating agreement may mandate a minimum amount of cash distributions over a given period (for example, annually or quarterly). This guards against the majority hoarding cash and the minority not realizing on the company’s profits.

This provision may also be drafted to bar managers from taking salaries, bonuses, or management fees from the company, all of which are hidden forms of distributions. To ensure equal treatment, request distributions to be pro rata to a member’s interest.

Broad Inspection Rights

While members generally have rights to books and records under state LLC law, by specifically listing all records you want management to deliver, the majority member is less likely to claim the minority’s demand for records isn’t reasonable.

A written clause that expressly calls for the delivery of balance sheets, income statements, cash flow statements, board meeting minutes, material contracts, and final and draft budgets gives you the information you need to keep an eye on management. It’s also a good idea to require audited financials to be provided on an annual basis.

Removal of Managers

You don’t have to resort to the courthouse to address a manger’s willful misconduct, reckless disregard, or gross negligence. Including a contractual procedure that allows removal of a manager for acts of cause gets you the necessary relief—that is, stripping that member of their managerial authority.

A proper removal mechanism should contain a required voting percentage to get rid of a manager for cause. To sufficiently protect the minority, this can be set as the majority vote of non-managing members.

You may also consider giving the breaching manager an opportunity to cure. A cure period of anywhere from 10 to 30 days is typical.

Regardless of whether you include a cure provision, make sure you strictly adhere to the procedure for managerial removal set forth in the operating agreement. Non-compliance with the operating agreement’s precise requirements for notice or cure can curtail your exercise of the removal right you fought hard for.

A 2025 decision by a New York appellate court concerning a limited partnership provides an illustrative example. The court invalidated the removal of a limited partnership’s general partner (the LLC equivalent of a manager) for the knowing and willful breach of the partnership agreement because the removal letter “did not put defendants [General Partner] on a [sic] notice that a ‘knowing, willful and material breach’ of the LP Agreement had already occurred and the 30–day cure period was triggered” as required under the LP agreement.

Fiduciary Responsibilities

Some LLC acts, such as Delaware’s, allow managers to disclaim their duties of loyalty and care—although not their good-faith duty—in the operating agreement. The Delaware LLC Act states that “[a] limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager.”

Reject any such provision. Regardless of whether you go to court, you want to be sure the majority is bound by the full panoply of fiduciary obligations. Majority members are less likely to waste company assets, or withhold distributions, if they know they’re going to be held to their fiduciary duties of loyalty and care. As a minority member, you don’t want to give up the protection of these twin obligations.

Buyout

If a majority’s acts rise to a level of negligence or misconduct that makes business partnership impossible, buyout is a nuclear option—if the operating agreement permits it.

If you want the option to purchase a member’s interests, the operating agreement must provide for that buyout right and set forth a process for valuing the disassociated member’s units. In determining this value, consider application of a marketability and/or minority discount.

These discounts account for the illiquid nature of shares in a closely held entity (the marketability discount). And assuming the member being bought out happens to be a minority as well, the lack of control that comes with holding those minority interests (the minority discount).

A marketability discount is a liquidity discount that accounts for membership interests in a closely held LLC not being publicly traded, meaning there’s no ready market for members to easily dispose of their interests. This hindrance to an easy sale is one less attractive feature of owning an interest in a closely held entity, so a discount is taken for this lack of marketability.

A minority discount accounts for the limited rights attached to a minority owned interest. Because minority owners generally lack managerial rights, owning a minority interest is less desirable than owning a majority one. This calls for application of a minority discount.

Key Takeaways

A member’s equity percentage can be a misleading indicator of control. As a minority member, you are as strong (or as weak) as your operating agreement provides.

A powerful minority has a veto over key transactions, is entitled to a minimum in distributions, and isn’t obligated to constantly turn over cash to the company. If you can fashion on operating agreement that gives you these rights, the control generally associated with a majority equity stake becomes illusory.

Careful consideration of the above governance topics can put you in the driver’s seat, allowing as much managerial control as majority members. This also ensures your equity stake isn’t left to the whims of the majority.

Early engagement of counsel is crucial. You shouldn’t wait for a situation where you’re locked out of significant decisions with no recourse under the operating agreement. Examples of this include increasing the number of membership units, cutting distributions, or entering into new lines of business.

Involving counsel at the outset lets you negotiate and draft governance provisions that, accounting for the unique features of both your business and your business partners, give you the level of control you desire.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ashwini Jayaratnam is a co-leader of DarrowEverett’s business litigation and dispute resolution practice group, with experience representing clients in all stages of litigation.

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