Operating Agreement

What an Operating Agreement Covers

An operating agreement is the internal rulebook for an LLC. It addresses how the company will be managed (member-managed vs. manager-managed), how profits and losses are distributed among members, what happens when additional capital is needed (capital calls), how decisions are made and votes are allocated, restrictions on transferring membership interests, procedures for admitting new members, buyout provisions if a member wants to exit, and dissolution procedures if the LLC is wound down. Without an operating agreement, the LLC defaults to state law — which rarely aligns with what the members actually want.

Why It Matters in Real Estate

Real estate LLCs face situations that general business partnerships rarely encounter: capital-intensive acquisitions, refinancing decisions, major renovations, property sales, insurance claims, and tenant disputes. An operating agreement tailored to real estate addresses these scenarios explicitly. Who decides when to sell the property? What happens if one member cannot fund their share of a capital call? Can a member force a sale? These questions seem academic when everyone is getting along but become critical during disagreements, market downturns, or life changes like divorce or death. The operating agreement is your partnership prenup.

Single-Member vs. Multi-Member LLCs

Single-member LLCs still benefit from an operating agreement even though there is no partner to govern. The document reinforces the separation between the individual and the LLC, strengthening the liability protection shield. Courts are more likely to respect the LLC's separate legal status (and not "pierce the corporate veil") when a formal operating agreement exists. For multi-member LLCs, the operating agreement is absolutely mandatory — it is the document that prevents misunderstandings and provides a framework for resolving disputes without litigation.

Key Provisions for Real Estate LLCs

Real estate operating agreements should address several critical scenarios. Capital call provisions define how additional funding requests work — how much notice is required, what happens to non-contributing members (dilution, penalty interest, or forced buyout). Distribution waterfalls specify the order and amounts of profit distribution. Refinance and sale authority clarifies who can authorize major transactions and what approval thresholds are required. Right of first refusal prevents members from selling their interest to outsiders without offering it to existing members first. Deadlock provisions provide a mechanism for resolving disputes when members cannot agree on major decisions.

Amendment Process and Attorney Involvement

Operating agreements should be living documents that can be amended as circumstances change, but the amendment process itself should be clearly defined — typically requiring unanimous consent or a supermajority vote. Amendments should be documented in writing and signed by all members. While online templates exist, real estate operating agreements should be drafted or reviewed by an attorney experienced in real estate and business law. The cost ($1,500–$5,000) is minimal compared to the potential cost of litigation when a poorly drafted agreement fails to address a critical scenario. Update your operating agreement whenever membership changes, new properties are acquired, or significant business decisions are made.