An LLC that has more than one member needs to have a written agreement that establishes and governs the members’ rights and obligations among themselves involving all aspects of their ownership and involvement with the LLC. Unlike a corporation that relies heavily on default statutes, an LLC is extremely flexible in that except for a small number of required default provisions under your state’s LLC Act, the operating agreement can be drafted to address almost any concerns or scenarios the members might contemplate. Among other things, the operating agreement documents profit and loss allocations, distribution rights and voting rights, as well as procedures for handling the departure and addition of members and any restrictions on the transferring of interests. Having an operating agreement in place at the outset helps prevent future disagreements among the members since the preparation and review process can ensure everyone involved is on the same page.

A main contributor to the complexity of many operating agreements are several long sections addressing federal partnership tax rules. By default, a multi-member LLC is taxed as a partnership. This means that the LLC itself does not pay taxes; rather the tax obligation falls on the members. The tax-related provisions of the Operating Agreement are generally needed in order to ensure that each member is allocated its proper share of income or loss in terms of both relative economic rights to distributions and certain required allocations under the federal tax regulations. For example, if you receive an LLC interest in exchange for services, while another member makes a cash investment, if the operating agreement is not drafted properly, your receipt of the LLC interest could be taxable to you. I suggest running your Operating Agreement by an attorney familiar with operating agreements and the tax issues relating to them to make sure the Operating Agreement captures the overall results you had in mind.

In short, operating agreements are complicated because they cover a wide range of matters (and potential sources of disagreement) in a single document, and they also document the structure of distributions and decision making desired by the members in a context where the variations are essentially limited only by the imagination (and agreement) of the members.