INTERVIEW ON THE PRICE OF BUSINESS SHOW, MEDIA PARTNER OF THIS SITE.
Recently Kevin Price, Host of the nationally syndicated Price of Business Show, interviewed Alexander Paykin.
The Alexander Paykin Commentaries
An operating agreement is often described as the “constitution” of an LLC. That description is accurate because the operating agreement governs how the company functions, how power is shared, and what happens when members disagree or want to leave. Many owners treat operating agreements as paperwork they sign once and never revisit, but in practice this document becomes most important when circumstances change, money gets tight, or relationships strain. A well-drafted operating agreement turns uncertainty into a set of rules that members can rely on when business decisions become difficult.
Capital Contributions: The Business’s Financial Bedrock
Capital contributions are where many operating agreements begin, and for good reason. The agreement typically sets out what each member contributes at formation and how that contribution connects to the member’s ownership interest. Contributions can be cash, property, or services, and the agreement should be clear about what counts as a contribution and when it is deemed fully made. Problems often arise when members assume that “sweat equity” and cash are automatically treated the same way, or when they assume that a promised contribution does not matter if it is not immediately paid in. The operating agreement is where those expectations should be made explicit.
Just as important, operating agreements often address what happens after formation if the company needs more money. If additional contributions are required or permitted, the agreement should specify who can demand them, whether participation is optional, and what happens if one member cannot or will not contribute. This is where conflicts can turn into control disputes, because money and power tend to move together. An operating agreement that does not define the consequences of unequal follow-on funding can invite claims of unfair dilution, breach of duty, or backdoor changes in control.
Voting Rights: Ownership and Control Are Not Always the Same
One of the most misunderstood features of an operating agreement is voting power. Many LLC members assume that voting rights automatically match ownership percentages, but operating agreements can allocate voting in different ways depending on what the members negotiated. Some agreements grant voting rights based on percentage interests, others grant equal votes per member, and others create special voting rights for certain members or managers. Even when votes are percentage-based, the agreement can require higher thresholds for major decisions, which can give minority members meaningful blocking power.
Operating agreements also commonly distinguish between routine operational decisions and fundamental decisions that reshape the company. If the agreement is drafted thoughtfully, members know in advance which decisions can be made by a manager, which require member approval, and which require supermajority or unanimous consent. That clarity helps prevent everyday disputes from becoming existential conflicts and helps protect members from surprises when a major transaction is proposed.
Deadlock Provisions: The Clause You Hope to Never Use
Deadlock provisions exist because disagreement is not a hypothetical risk; it is a normal part of business life. Deadlock is most dangerous in LLCs where voting power is evenly split or where the decision thresholds allow one side to block the other. When deadlock occurs on a key issue, the business can become stuck, unable to sign contracts, raise funds, hire leadership, or pursue an exit. Without a roadmap, the company can drift into crisis or litigation.
A strong operating agreement anticipates deadlock and creates a sequence of steps for resolution. Often that sequence starts with internal notice and negotiation requirements, moves into mediation or arbitration, and then provides a decisive mechanism if resolution still fails. The purpose is not to punish either side; it is to protect the business from paralysis. In the real world, the presence of a clear deadlock mechanism also changes behavior because members are more likely to compromise when they understand what happens if they do not.
Exits: Planning for Departures Without Destroying the Company
A member’s departure can be voluntary, forced, or triggered by life events, and operating agreements should address each of these realities. If a member simply wants out, the agreement should state whether withdrawal is allowed, when it can occur, and what financial terms apply. If a member dies, becomes disabled, files bankruptcy, or otherwise experiences a “triggering event,” the agreement should explain whether the member’s interest transfers to heirs, must be offered to remaining members, or is purchased by the company.
The most contentious part of exit planning is usually valuation and payment terms. If the agreement is silent, disputes can become expensive quickly because members may have very different views about what the business is worth and how quickly buyout payments must be made. A good operating agreement sets expectations on valuation methodology and timing in a way that is realistic for the company’s cash flow. It also helps prevent the company from being forced into an emergency sale or an unworkable payment schedule.
The Operating Agreement as a Risk-Management Tool
Operating agreements are not just compliance documents. They are private rulebooks that can be tailored to match how the members want to run the business. When drafted carefully, they reduce the likelihood of disputes and, when disputes occur, reduce the cost of resolving them. The operating agreement does not eliminate conflict, but it can prevent conflict from becoming chaos.
