Many Michigan LLCs are formed online in an afternoon and never get an operating agreement, or get a generic template that nobody reads. That works until the owners disagree, someone wants out, or a buyer asks for the documents. At that point, the Michigan Limited Liability Company Act supplies default rules, and those defaults may not match what the owners thought they agreed to.
These are the provisions we look for first.
1. Ownership and capital contributions
Who owns what percentage, what each owner contributed, and whether anyone must contribute more later. If ownership and profit-sharing are not the same, the agreement should say so clearly.
2. Management and decision-making
Whether the LLC is managed by all members or by one or more managers, and which decisions need more than a simple majority. Taking on debt, adding an owner, selling the business and changing the agreement itself usually deserve a higher vote.
3. Distributions and tax distributions
When profits are paid out, and in what order. Because LLC owners are taxed on their share of profit whether or not it is distributed, a tax distribution clause makes sure each owner receives enough cash to pay the tax on income the business earned.
4. Buy-sell terms
What happens when an owner dies, becomes disabled, retires, gets divorced or simply wants out. Good buy-sell terms say who can buy the interest, how the price is set, and how it is paid, so the business is not forced into a dispute or a sale at the worst time.
5. Transfer restrictions
Limits on selling or giving an ownership interest to an outsider without the other owners’ consent, often with a right of first refusal. Without them, you could end up in business with someone you never chose.
6. Deadlock and dispute resolution
In a two-owner company split 50/50, a single disagreement can stop the business. The agreement should include a way out, such as a tie-breaking vote, mediation, or a buyout mechanism, before anyone needs a court.
7. Covenants and confidentiality
Non-compete, non-solicitation and confidentiality terms that apply to every owner, tied to the buyout terms. They protect the remaining owners if a partner leaves and starts competing.
Keep the agreement in step with the taxes
Several of these provisions have tax consequences. An S Corporation election, for example, requires one class of ownership, so profit-sharing terms have to be drafted carefully. Buyout payments, capital accounts and distributions also show up on the tax returns. When the agreement and the returns are prepared with each other in mind, there are fewer surprises later.
If your LLC has no agreement, or an agreement nobody has read since the day it was signed, it is worth a review. See how we draft operating agreements and bylaws.
Related practice areas
Operating Agreements & Bylaws →Shareholder & Partner Disputes →Non-Compete & Non-Solicitation Agreements →This article is general information, not legal or tax advice for your situation. Reading it does not create an Attorney-client relationship.