Why an Updated Operating Agreement is Important for Your LLC
Forming an LLC offers key benefits for small business owners, but it’s important not to overlook the essential step of creating an operating agreement.
Limited Liability Company (LLC) has become one of the most popular business entity types for solo and small business owners. It is considered to be more flexible than a corporation and has the advantage of combining the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation, creating the best of both worlds for business owners.
Once an LLC is created by filing the Articles of Organization with the Secretary of State, an LLC operating agreement should be created. Missouri statute requires that all limited liability companies have an operating agreement. However, it is not filed with the Secretary of State or any other government agency. Each business entity must create and maintain this important document themselves.
When a business owner decides to file their LLC on their own, also creating a thorough operating agreement is the step that is most often overlooked.
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The LLC operating agreement, along with a corresponding buy-sell agreement, is an internal document outlining how the business operates. It describes what happens when disputes arise between members, how membership interests can be transferred, who runs the business, and even what happens if a member goes bankrupt, gets divorced, or dies. A lot of unnecessary strife, wasted resources, and interruption of business can be avoided by having an LLC operating agreement in place and signed by all members, making it legally binding.
A single-member LLC may not need to be concerned about disputes between members, transfers of funds, or ownership of fixed assets, but to keep the limited liability status, the sole owner must be able to show that operations are a separate entity from the owner’s private financial matters. With a solid operating agreement in place, the LLC will have its own limited liability status.
Many people create operating agreements but forget to update them. Time goes by quickly. Life happens. Businesses may grow and evolve; members may change. Financial crises such as bankruptcy may happen, or personal issues such as divorce and death may impact operations. These situations can lead to all kinds of trouble.
Even the most carefully prepared operating agreement should be reviewed regularly to ensure that it is current and reflects the plan for the business. Not keeping the operating agreement current could cause legal issues, such as having to deal with probate, should one of your members die or become incapacitated.
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Many people treat their LLC’s operating agreement like a set-it-and-forget-it contract. But in reality, an operating agreement is more like a company’s constitution in that it must evolve with your business. As companies grow, change, and adapt, failing to update this foundational document can introduce confusion, risk, and even legal exposure.
By embracing the idea that your operating agreement is a living document to be reviewed and updated periodically, you help ensure it remains aligned with your business’s real-world operations, membership, goals, and legal obligations.
Here are common triggers that should prompt a review or update to your LLC’s operating agreement and buy-sell agreement:
Change in membership or ownership interest — If a member joins, leaves, sells interest, passes away, or undergoes a major life change, the agreement needs updating to reflect new ownership shares, voting rights, and buy-out or succession provisions.
Shift in management structure or business operations — If your LLC moves from being member-managed to manager-managed (or vice versa), or if roles and responsibilities change significantly, the operating agreement must reflect who makes decisions and how.
New capital contributions, changed profit/loss distributions, or financial restructuring — As members invest more capital or agree to change how profits or losses are divided, the agreement should be updated to clearly document those terms.
Business expansion, diversification, or strategic changes — When the company expands operations, opens new lines of business, or changes its business model, the operating agreement should be revised to cover these new realities.
Regulatory, tax, or legal changes — Laws or regulations governing LLCs may evolve. Updating your operating agreement ensures compliance and avoids default-statute rules that may not align with your specific business.
Need for formal dispute resolution, succession planning, or exit strategy — As your LLC grows and members’ lives become more complex, having clear processes for handling disputes, member exits, death or incapacity, or dissolution can save time, money, and emotional stress.
Allowing an operating agreement and buy-sell agreement to become outdated can create serious problems for an LLC. When the document no longer reflects how the business actually functions, confusion and disagreements among members are far more likely. Unclear or outdated terms can lead to disputes over decision-making authority, profit distribution, and what should happen when a member leaves.
An outdated agreement also opens the door to unwanted legal and financial complications. If the document is incomplete or obsolete, state default rules may fill the gaps in ways that do not align with the members’ intentions. And without updated provisions addressing buyouts, member exits, incapacity, or death, the LLC may face probate issues, internal disputes, or even dissolution. Keeping the operating agreement current is essential to avoiding these risks and ensuring the long-term stability of the business.
Updating your operating agreement may feel like a tedious administrative task, but it’s the difference between a business that runs smoothly and one that gets bogged down by disputes, uncertainty, or legal risk.
If you haven’t revisited your operating agreement in a while: consider this a timely reminder.
At Assertion Law Firm LLC, we can provide you with the expertise to create and review your operating agreement for the basic requirements and ensure that the specific legal issues that impact your individual business are addressed. Please call our office at (888) 887-4170 to schedule and update for your operating agreement.
Forming an LLC offers key benefits for small business owners, but it’s important not to overlook the essential step of creating an operating agreement.
