LLC Operating Agreements: The Disputes That Happen Without One

By Eugene Bondar, Esq.

Nearly every LLC operating agreement dispute I see traces back to the same root cause: the members never wrote one, or wrote one and stopped following it. What surprises most owners is that New York doesn’t treat this as optional. LLC Law § 417(a) provides that “the members of a limited liability company shall adopt a written operating agreement,” and § 417(c) provides that “[a]n operating agreement may be entered into before, at the time of or within ninety days after the filing of the articles of organization.”

What fills the gap when there’s no LLC operating agreement

The statute requires the agreement, but nothing forces the issue. Section 417 doesn’t spell out a penalty for skipping one, so LLCs form and run for years out of step with the statute, and no one notices until a disagreement makes someone ask what the rules actually are. At that point the answer is New York’s Limited Liability Company Law defaults, which supply provisions for everything the members never addressed: voting (§ 402), profit and loss allocation (§ 503), transfers (§ 603), and dissolution (§§ 701, 702). Those defaults are generic by design. On profits, for example, § 503 provides that “[i]f the operating agreement does not so provide, profits and losses shall be allocated on the basis of the value, as stated in the records of the limited liability company if so stated, of the contributions of each member,” and on voting, § 402(a) provides that “[e]xcept as provided in the operating agreement … each member of a limited liability company shall vote in proportion to such member’s share of the current profits of the limited liability company.” They weren’t written around your capital contributions or your unwritten understanding with your partners. A 50/50 ownership split with no tiebreaker mechanism, for example, can deadlock a company over a single disagreement, with no default rule that resolves it short of a costly judicial dissolution proceeding, where under § 702 the court “may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”

Where these disputes actually start

A handful of fact patterns account for most of the LLC operating agreement disputes that reach a lawyer’s desk. Profit distribution disagreements, where members had a verbal understanding of an unequal split but nothing in writing to enforce it. Management authority fights over who can bind the LLC: one member signs a lease or vendor contract, and the others say it was never authorized. Exit and buyout disputes, where a departing member has no valuation formula, no payment timeline, and no restriction keeping them from competing the next day. Capital contribution disagreements, where one member put in more cash or sweat equity than the others and there’s no record of what that was supposed to buy. And ownership passing sideways (to an estate, an heir, or an ex-spouse through divorce), putting someone with no operating role in an economic position tied to the company (see the FAQ below on LLC Law §§ 603 and 608).

What a working agreement actually covers

A well-built operating agreement addresses capital contributions and how future capital calls work; how profits and losses are allocated and when distributions actually go out; whether the LLC is member-managed or manager-managed, and which decisions require unanimous consent versus a simple majority; transfer restrictions and rights of first refusal; buy-sell triggers for death, disability, divorce, or deadlock, and how the buyout price gets set; and a dispute-resolution mechanism (mediation before litigation, or a defined way to break a deadlock) so a disagreement doesn’t automatically become a lawsuit. Much of this overlaps with the contract clauses that generate the most disputes in commercial agreements generally: an operating agreement is, at bottom, a contract among the owners, and it fails for the same reasons other contracts fail.

Write it while everyone still agrees

The statute’s ninety-day window points at something real: an operating agreement is easiest to draft when the members are still on good terms, before the disagreement, while no one has an incentive to hold out for better terms. Missing the window doesn’t bar you from adopting one later, and retrofitting is common, but it’s harder work once positions have hardened. The agreement should also be revisited any time membership, contributions, or management arrangements change. An agreement written for the company’s first year rarely fits its fifth.

If your LLC doesn’t have an operating agreement, or has one that no longer matches how the business actually runs, this firm drafts and updates them as part of its business contracts practice, and handles entity governance and structuring questions under its additional counsel work for closely held companies. The initial consultation is free.

Related services: Business & Commercial Contracts · Additional Counsel · Rockland County Business Formation · Rockland County Business Litigation

Attorney Advertising. This post is for general informational purposes only and does not constitute legal advice. LLC governance rules, default statutory provisions, and the enforceability of any given clause vary by state and by the language of the operating agreement; consult an attorney about your specific situation.

Frequently asked questions

Does New York require an LLC to have an operating agreement?

Yes. New York LLC Law § 417(a) provides that "the members of a limited liability company shall adopt a written operating agreement," and § 417(c) provides that "[a]n operating agreement may be entered into before, at the time of or within ninety days after the filing of the articles of organization." Section 417 does not spell out a penalty for failing to adopt one, which is why many LLCs operate without one; the practical consequence is that the default provisions of the LLC Law govern voting (§ 402), profit and loss allocation (§ 503), transfers (§ 603), and dissolution (§§ 701, 702) instead of terms the members chose.

Can an operating agreement be added after the LLC is already formed?

Yes. LLC Law § 417(c) contemplates adoption "before, at the time of or within ninety days after the filing of the articles of organization," and goes on to provide that "[r]egardless of whether such agreement was entered into before, at the time of or after such filing, such agreement, may be effective upon the formation of the limited liability company or at such later time or date as provided in the operating agreement." An LLC that missed the ninety-day window is not barred from adopting one later. The default vote is a majority, not unanimity: under § 402(c)(3), "[e]xcept as provided in the operating agreement ... the vote of a majority in interest of the members entitled to vote thereon shall be required to ... adopt, amend, restate or revoke the articles of organization or operating agreement," subject to § 417(b), which provides that, "except as otherwise provided in the operating agreement or the articles of organization, without the written consent of each member adversely affected thereby," no amendment shall be made that "increases the obligations of any member to make contributions," "alters the allocation for tax purposes of any items of income, gain, loss, deduction or credit," "alters the manner of computing the distributions of any member," or "allows the obligation of a member to make a contribution to be compromised by consent of less than all the members." (Under § 402(g), an LLC whose articles were filed before that subdivision took effect remains governed by the prior version of § 402 unless its operating agreement provides otherwise.) It is more straightforward before a dispute arises than after, when proposed terms start to look like a negotiating position rather than a neutral framework.

What happens to a member's LLC interest if they die or divorce?

Under LLC Law § 608, if a member "dies or a court of competent jurisdiction adjudges him or her to be incompetent to manage his or her person or his or her property, the member's executor, administrator, guardian, conservator or other legal representative may exercise all of the member's rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member." Under § 603(a), "[e]xcept as provided in the operating agreement," a membership interest "is assignable in whole or in part," but an assignment "does not dissolve a limited liability company or entitle the assignee to participate in the management and affairs of the limited liability company," and "the only effect of an assignment of a membership interest is to entitle the assignee to receive, to the extent assigned, the distributions and allocations of profits and losses to which the assignor would be entitled." The result can be an estate or an assignee in an economic position tied to the company without any active management role. Buy-sell provisions triggered by death, disability, or divorce are among the most common gaps a written agreement is drafted to close.