Limited Liability Companies (LLCs) use operating agreements to define certain important things about the business. This might include who owns the business, how decisions are made in the company, the process for owners joining and leaving the organization and similar areas. Operating agreements are an important part of running your business in a clear and agreed-upon way, but what if you disagree with what the document says?
In these cases, you might be tempted to break the LLC operating agreement. If you do, it’s important to understand the implications. Breaking an operating agreement is a breach of contract that’s likely to expose you to certain costly legalities and liabilities, so you should only break it as a last resort.
If you’re certain you want to go ahead, here are the steps you can take.
Establish If You Have an LLC Operating Agreement in the First Place
Although we always recommend an LLC create an operating agreement, it is possible that your LLC doesn’t have one — in which case, there may not be an agreement to break. Review the formation documents and agreements that you signed when starting up your LLC to confirm if you have an operating agreement.
What if an LLC has no operating agreement? Follow these steps:
If you’re a multi-member LLC and partner with other business owners, ask them to send you the latest version of the operating agreement. If it’s a verbal agreement, then ask for the terms to be defined to you.
If you’re a single-member LLC and there aren’t any other owners, then you should carefully search and review your documents for an agreement.
You’re only legally required to have an operating agreement if you’ve formed an LLC in one of the following states: California, Delaware, Maine, Missouri, Nebraska or New York. Note that operating agreements can be either verbal or written. And yes, you can write your own operating agreement or seek the help of a business expert.
In the absence of a written operating agreement, the members of the LLC may be bound by “default” rules for running LLCs in your state. These rules will vary from state to state, so you should consult a business attorney if you cannot access an existing written operating agreement.
The operating agreement itself may detail the consequences for breaking the agreement.
Single-Member LLC Owners Can Amend Their Operating Agreements
If you’re the only owner of your LLC, then you can amend your operating agreement yourself without breaking it. This is as simple as making the changes to the document and signing the new version. You do not need to file a new version of the operating agreement with anyone outside your business. Simply save the new agreement for your business records.
Decide On Your Reason for Breaking the Operating Agreement
If you’re part of a multi-member LLC and there are other owners, then you may still decide to break the agreement. Circumstances that might cause you to break the agreement could include:
It’s important to have clear reasoning for breaking an operating agreement and to understand how the agreement would need to change for you to accept a new version of it.
Talk to Other LLC Owners About Amending the Operating Agreement
Amending your operating agreement is almost always going to be a better option than deciding to break it. This starts with talking to the other LLC owners about your issues with the current agreement.
Get your reasons together so you can clearly state your concerns with the existing agreement.
Talk through your points one by one and approach each in a calm and rational way without emotion.
State what you would like to see changed about the operating agreement and the new terms that you would accept.
Understand what the other LLC owners are willing to offer and carefully consider if that would meet your needs.
Be prepared to compromise to reach an agreement that works for everyone.
It can sometimes be helpful to have a neutral arbiter who can help to guide the discussion, state points clearly and keep conversations civil and on topic.
If all owners can reach common ground on acceptable changes, then you can amend the operating agreement. You would propose formal changes and circulate them to other LLC owners. Once everyone agrees to the proposed changes, you can write a new operating agreement incorporating the amends. All LLC owners would then sign the updated operating agreement, and the new version becomes a governing document for the company.
Break the LLC Operating Agreement If You Have No Other Choice
Breaking the agreement should be your last resort. Your LLC operating agreement is a legal contract between the owners of your business. In all cases, you should speak to a specialist business attorney who can advise you on several important areas:
In the absence of a written agreement, if any default rules apply to your business
Any processes you need to follow to formally break the LLC operating agreement
Notifications that you must make to other LLC owners and stakeholders
Possible outcomes from breaking the agreement and breaching the contract
What to expect about the likelihood of being sued and paying damages
Understand the Consequences of Breaking an Operating Agreement
Breaking the agreement is a breach of contract, which can expose you to significant consequences:
Being removed as an owner of the LLC
Forfeiting some or all interests in the business
Needing to go to court
Being sued by other LLC owners for damages
Note that rules governing breach of contract, damages and other factors do vary significantly from state to state.
We would always recommend resolving business and operating agreement issues in a fair and amicable way. An operating agreement exists to protect LLC owners and ensure everyone is working to a common understanding. Check out Incfile’s Operating Agreement service to get help with this important document.
Paul is a freelance writer, small business owner, and British expat exploring the U.S. When he’s not politely apologizing, he enjoys hats, hockey, Earl Grey Tea, mountains, and dogs.