Multi-Member LLC Operating Agreement: A Complete Guide
Starting a business with someone else who believes in your vision is exciting, be it friends, family, investors, etc. But that excitement can fade fast when you’re looking at an LLC operating agreement document. Now you have to decide who gets to make certain decisions, how profits get split, or what happens if one person wants out.
Without a written agreement in place, little disagreements aren’t just disputes that cause a little bit of tension here and there; they can end up in court. This is exactly why you need a multi-member LLC operating agreement.
In this guide, we’ll look at what it is, what it needs to cover, and why using a generic LLC operating agreement template isn’t necessarily going to save you money.
What Is a Multi-Member LLC Operating Agreement?
A multi-member limited liability company (LLC) operating agreement is a legal document that spells out how an LLC with two or more members carries out its business. It covers who owns what, how decisions get made, how profits and losses are divided, and what happens when there are disputes, and exit steps if a member leaves or the business dissolves.
Are You Legally Required to Have an Operating Agreement for Your LLC?
The short answer is no. However, while Texas law doesn’t mandate that LLCs have an operating agreement for your LLC, that doesn’t mean it’s legally advisable for you to skip it. Without an agreement, your LLC defaults to the Texas Business Organizations Code — a set of general rules that weren’t written with your specific business in mind.
While it’s a default set of rules that’s rooted in fairness, it may not necessarily be the best for your business model. Taking time to evaluate your business and goals and coming up with a well-thought-out operating agreement protects your business and its future.
| Sole business owner? We’ve written a guide on setting up a single-member LLC in Texas. |
Also, most investors, banks, and sometimes even landlords want to see your operating agreement and other governing documents to have an arrangement with you.
What Should a Multi-Member LLC Operating Agreement Include?
It varies from business to business, but they all share the same goal: safeguarding your business’s future. Most cover the same major areas, including:
1. Ownership and Capital Contributions
This outlines the percentages each owner has in the organization and what they contributed to get it; this includes cash, property, services, and other contributions. It’s really important to state this because if there’s ever a dispute on who owns what, this helps you solve it.
Note: You need to be as specific as possible with this. Simply saying something as vague as “50/50” isn’t documentation. State exactly what each member put in, when, and what happens if there are changes in the contributions.
2. Profit and Loss Allocation
While most people automatically assume that profit distributions are always split in proportion to ownership, it’s not always so. It depends on how you want to be; for example, a CEO and COO might have significantly more profit/loss shares because they run the day-to-day operations, while silent partners have less. What matters is that it is an agreement that explicitly states this, and they have to meet certain requirements from the IRS for Tax purposes.
Since members of your LLC aren’t employees, you’re not paying them salaries; because of this, you must clearly specify how profit and loss distributions are made and when.
3. Voting Rights and Decision-Making
Even though you’re operating a multi-member business, not every decision needs a vote. However, there are major decisions that need to be voted on, and your agreement should specify which ones.
Your agreements should say what everyday decisions that members or managers can make independently on behalf of the LLC and what are major decisions that require a vote. For example, taking on debt, admitting new members, selling business assets, or amending the operating agreement itself.
You should also state how the voting process works—such as whether you need a simple majority or a higher threshold (e.g., at least 65% agreement).
Tough decisions can lead to disagreements, so consider using a voting form. It helps keep votes anonymous and works well if team members are attending virtually from different locations.
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You May Also Like to Read: Voting Forms: How to Create + Components + Free Template |
4. Management Structure: Member-Managed vs. Manager-Managed
Multi-member LLCs can be run two ways:
- In a member-managed LLC, all members have authority to act on behalf of the business. This works well when everyone is involved day-to-day.
- In a manager-managed LLC, one or more designated managers handle operations. Other members of the LLC are passive — they have ownership interests but don’t run the business. This structure is common when some members are investors rather than operators.
You need to state the structure you’re following in your agreement document, defining what the manager can and can’t do without member approval.
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Trying to figure out the best structure for your business? Read our guide on choosing between an LLC and a subchapter S corporation |
5. Member Changes: Transfers, Buyouts, and Withdrawal
This is very important because life happens. You need to have a ready course of action when a member wants to leave or if one member dies. What if the remaining members want to force someone out?
These are already uncomfortable questions to answer when everyone’s still on good terms; what happens when things go wrong and there’s a heated dispute?
The operating agreement should spell out:
- Whether members can transfer their interest to someone else — and whether remaining members have a right of first refusal
- What triggers a buyout, and how the buyout price is determined
- What happens to a deceased member’s interest
- Under what conditions (if any) a member can be removed
6. Dissolution
Nobody starts a business to dissolve it, but if it gets to that point, you must have a binding agreement in place that says how the assets are distributed.
How a Multi-Member LLC Operating Agreement Affects Taxation
By default, the IRS treats a multi-member LLC as a partnership for federal tax purposes. This means the LLC doesn’t pay income tax itself; members are required to pay self-employment taxes on their share of business income.
This is one of the reasons some multiple-member businesses go for the S corporation status to reduce self-employment tax exposure, though it comes with its own requirements and trade-offs. Whatever your tax structure, the operating agreement should reflect how income is allocated — and that allocation needs to be consistent with how you file.
Can I Write My Own Multi-Member LLC Operating Agreement?
You can. There are so many free multi-member LLC operating agreement templates online, and most of them would suffice if your business has little to no peculiarities. But every business is different from the other.
A generic template is written for everyone and no one in particular. You need something tailored to your organization’s ownership structure, your industry, your state’s default rules, or the actual arrangement you and your co-owners discussed.
If you’re running a single-member LLC, a template often does the job. However, multi-member agreements are more complex — there are multiple members involved, more interests to protect, and more ways for things to go wrong.
Having an attorney draft an agreement specifically for your business ensures they review everything to protect your interests. They ask questions you haven’t thought to ask and flag situations you haven’t planned for.
That said, if you’re just starting and budget is tight, you can start with a solid template and have a lawyer review it. This helps catch potential issues and make the contract airtight while keeping costs down.
How to Amend a Multi-Member LLC Operating Agreement
Most operating agreements require a unanimous or supermajority vote to amend it. For the amendment to be legally binding, it needs to be in writing, signed by all members (or the required number), and kept with your business records.
Note: Even if majority of members agree to a change verbally or over email, you need to formalize it to it to be enforceable.
Does a Multi-Member LLC Need an EIN?
Yes. Any LLC with two or more members must obtain an Employer Identification Number (EIN) from the IRS, even if it has no employees. Multi-member LLCs file as partnerships for federal tax purposes, and a partnership needs an EIN to file returns.
If you don’t have one, you can apply for an EIN directly through the IRS website at no cost. You could also consult with a business lawyer to help you with the process.
Does a Multi-Member LLC Operating Agreement Need to Be Notarized?
Texas law doesn’t require it. But notarization adds a layer of evidentiary weight. If in the future, a member later claims they never signed, a notarized signature is harder to dispute.
Also, some banks and lenders require a notarized operating agreement before transacting with an LLC. It’s a good structure to have in place to protect you, even if things don’t go wrong.
How Does Forming a Multi-Member LLC Compare to a Partnership?
Both structures involve multiple members sharing a business. The key difference is liability.
In a general partnership, each partner is personally liable for the partnership’s debts and obligations — including debts that other partners incurred. An LLC separates the business’s liabilities from each member’s personal assets, so long as the LLC is properly maintained.
Make sure to review the advantages and disadvantages of forming a business partnership before you decide how to structure your LLC’s ownership.
What Happens If a Multi-Member LLC Doesn’t Have an Operating Agreement?
Texas’s default rules take over. The business code is not written against you, but it can lead to outcomes no one planned for. For example, Texas law may require unanimous member consent for decisions your partners assumed could be made by a majority. Once a dispute starts, trying to fill those gaps through negotiation or litigation tends to be expensive and slow.
The LLC’s liability protections also depend on treating the business as a real legal entity. Operating without foundational documents is one of several factors that can support a claim to “pierce the corporate veil” — and if a court agrees, members can be held personally liable for business debts.
| You May Also Like to Read: Protecting Your Personal Assets From Business Lawsuits in Texas |
LLC Operating Agreement FAQs
How does a multi-member LLC operating agreement affect taxation?
Multi-member LLCs are taxed as partnerships by default — income passes through to each member’s personal return. The operating agreement can set profit allocations that differ from ownership percentages, but the IRS requires those special allocations to have substantial economic effect to hold up.
How can a multi-member LLC operating agreement be amended?
Check the amendment provisions in your agreement first — most require a unanimous or supermajority vote. The amendment should be written, signed by the required members, and kept with your business records. Verbal changes are hard to enforce.
What is the difference between a member-managed and manager-managed LLC?
In a member-managed LLC, all members can bind the business. In a manager-managed LLC, a designated manager runs day-to-day operations; other members are passive. The operating agreement should define which structure applies and what the manager can do without going back to the members for approval.
How are members paid in a multi-member LLC?
Members aren’t employees, so they don’t receive a salary. They take distributions from the LLC’s profits. Some agreements also include guaranteed payments — fixed amounts paid to a member who provides ongoing services, regardless of whether the business turns a profit. The agreement should specify how and when distributions are made.
MCIS Law, PLLC is a Texas business law firm. If you’re forming a multi-member LLC or need an operating agreement reviewed or drafted, contact our office to discuss your situation.
