An operating agreement does not feel urgent when you are riding the high of a new venture. The Articles of Organization get filed, the bank account opens, and the first contracts roll in. Everyone is on the same page until they are not. In Michigan, the Limited Liability Company Act supplies a set of “default” rules that step in when your operating agreement is silent. Those default rules are blunt instruments. They do not know your business, your partners, or your risk tolerance. The operating agreement is where you trade one-size-fits-all for precision, writing the rules that fit your ownership, your operations, and your future. Over and over, the most expensive conflicts I see trace back to the same blind spots key provisions that were skipped because they felt awkward to discuss, tedious to draft, or unnecessary “for now.” What follows is a practical walk-through of ten clauses Michigan LLC owners routinely regret leaving out, and why weaving each one into your agreement carefully and explicitly pays for itself the first time it’s tested.
Start with a mindset shift. An operating agreement is not only a governance document; it is also an expectations document and a risk-allocation document. It spells out how money and decisions move, what happens when the unexpected arrives, and where disputes go to be resolved. Michigan law gives you room to contract for most of this in a way that suits your situation. If you do not fill that room, the law fills it for you, often in ways that reward whoever is loudest or quickest to the courthouse. The sections below describe the trouble patterns that arise when clauses are missing, and how to address each topic with enough detail to prevent ambiguity from becoming litigation.
The first regret usually comes disguised as optimism: owners assume their contributions are obvious and that equity will “work itself out.” Capital is seldom that simple. Clarifying capital contributions who contributes cash, who contributes property, who contributes services, and when those contributions are due belongs in the operating agreement, not in side conversations or scattered emails. Set out initial contributions in a schedule, define whether services can earn units or only a profits interest, and describe how and when the company can make capital calls. If future contributions will be required to meet debt covenants or fund growth, explain how those calls will be authorized and what happens if an owner refuses or cannot pay. Do dilution mechanics automatically reduce the non-paying member’s percentage? Is there a penalty interest rate on overdue calls? Does the company have a right to purchase the delinquent member’s interest at a formula price? When these rules are missing, the member who pays to keep the lights on feels exploited, and the member who cannot pay feels squeezed. A thoughtful capital clause avoids both resentments by writing the math in advance.
Close on the heels of capital comes an even more delicate subject: how votes are counted and how power is distributed. In the early days, many Michigan LLCs default to “member-managed,” with everyone nominally equal, and decisions made by majority or unanimity depending on the issue. That simplicity evaporates as soon as interests diverge. The operating agreement should spell out whether the company is member-managed or manager-managed, who the manager is, how that manager is appointed and removed, and what matters require member approval regardless of the manager’s authority. You can and often should separate day-to-day operational decisions from “major decisions” like issuing new equity, approving loans or liens, amending the agreement, entering affiliate transactions, or dissolving the company. For member approvals, decide whether votes are per capita, by percentage interest, or by class, and whether certain actions need a supermajority. Tie voting to record dates and meeting procedures and establish a written consent mechanism so the business can move without trapping everyone in a room. Nothing torpedoes trust faster than a surprise decision pushed through by someone claiming power you never discussed. The voting and management clause is where you talk about that, once, with clarity.
Distribution and tax allocation mechanics are another fertile ground for regret when they are left to default rules or back-of-the-napkin assumptions. Cash rarely arrives in the same pattern as taxable income; seasonal swings, receivables lag, and prudent reserves mean your K-1 might show income long before the company has cash to distribute. That creates “phantom income,” the most demoralizing tax experience for owners. A solid operating agreement addresses this directly. It states whether distributions are pro rata to ownership or conditioned on hurdles, sets a distribution waterfall when there are preferred returns or multiple classes, and, crucially, commits to tax distributions cash paid at least once a year in an amount designed to cover expected federal, state, and local taxes on the member’s allocable share of income. The provision should also explain how allocations are made under Subchapter K principles, how built-in gain and loss are handled if property is contributed, and how the company will deal with partnership audit rules and the “partnership representative.” Without these details, tax time becomes a scramble, and members with different tax profiles feel treated unfairly even when the company is trying to do the right thing.
Transfer restrictions sound unfriendly until you imagine waking up partnered with someone you never chose. When your agreement is silent, a member who wants out can create real friction by moving interests to a spouse in divorce, a creditor after a judgment, or a third-party buyer who wants to replace collaboration with control. Michigan LLCs can address this with a tight transfer provision. Require company or member consent for any transfer of membership interests beyond permitted transfers to estate planning vehicles. Distinguish between assigning economic rights and admitting a new member with governance rights, and make clear that admission of a new member requires approval you specify often a supermajority. If you want to maintain a circle of trust, write a right of first refusal or right of first offer, explaining timelines, notice mechanics, and how price will be set. Also consider whether “tag-along” and “drag-along” rights make sense if your endgame includes a potential sale; these provisions prevent a minority from being stranded or a majority from being held hostage. You will never regret refusing to leave transfers to chance.
Buy-sell arrangements are transfer restrictions’ more sophisticated cousins. They answer the question everyone would rather avoid: what happens to an ownership interest when a founder dies, becomes disabled, retires, or simply wants out? The worst time to negotiate price and terms is while grieving or in a health crisis. A buy-sell clause lets everyone breathe easier by setting events that trigger a buyout, the party with the right or obligation to buy (the company, the remaining members, or both), the price formula or appraisal method, and the payment terms. Price formulas can tie to trailing EBITDA, an agreed multiple, a third-party valuation, or a balance-sheet metric adjusted for goodwill; the point is not to pick the perfect number today, but to choose a method you can live with tomorrow. Spell out whether insurance will fund certain buyouts, how disputes over valuation get resolved, and whether a departing member remains bound by non-compete or non-solicit obligations. When buy-sell is missing, exits become ad hoc, expensive, and emotionally charged.
Deadlock resolution deserves its own runway. In a two-member LLC with equal votes, or any company with supermajority requirements, the possibility of stalemate is not hypothetical; it is a matter of time. If the agreement is silent, deadlock can freeze hiring, financing, or strategic moves at the worst possible moment. A deadlock clause can start with staged escalation: first internal negotiation, then an advisory vote or board of advisors, then mediation. If those steps fail, the agreement can pivot to a decisive mechanism that prioritizes speed and fairness over perfect price discovery think of a “Texas shoot-out” where either side can name a price and the other chooses to buy or sell at that number, or a “baseball arbitration” in which an arbitrator must choose one of the parties’ final offers with no power to split the difference. The right choice depends on the personalities involved and the business’s complexity, but any of these options beat paralysis. Spell out timelines and how day-to-day operations continue while the deadlock process runs, so key relationships and employees do not become collateral damage.
Fiduciary duty language is another area where silence breeds misunderstanding. Michigan law provides baseline duties around loyalty and care for those who manage the LLC. In closely held businesses, owners often assume these duties are flexible, and they are to a point. The operating agreement is the place to define managerial discretion, to permit or restrict competing ventures, to allow certain related-party transactions if disclosed and approved, and to set standards for exculpation and indemnification. A carefully drafted exculpation provision can protect managers and members from personal liability for ordinary negligence while holding the line against bad faith, willful misconduct, or knowing violations of law. Complement that with a robust indemnification and advancement clause that allows the company to pay or reimburse defense costs when someone is sued for acting in their company role. These lines are easiest to draw before a crisis. When they are missing, an honest mistake becomes a blame game, and a garden-variety contract dispute morphs into personal allegations that threaten the business and the people who run it.
Confidentiality and intellectual property assignments do not feel like governance, but they are essential for any venture that creates value in code, content, design, or relationships. An LLC can own only what is assigned to it. If founders contribute pre-existing software, trademarks, or customer lists, the operating agreement should reference schedules transferring those assets to the company, not merely promising to do so later. For future work, a present assignment of intellectual property created “within the scope of company business” makes clear that the LLC not the individual member owns what is built for the company. Add a confidentiality obligation that survives a member’s departure, define what counts as confidential information, and carve out the obvious exceptions for information already public or received from a third party with the right to share it. Without these provisions, the company’s most valuable assets can walk out the door with a departing founder, and you will spend your energy arguing over who owns the crown jewels instead of selling them.
The records, accounting, and inspection section is the least glamorous part of an operating agreement and the one most likely to prevent unnecessary conflict. Owners who feel “kept in the dark” assume the worst. Clarity on financial systems, fiscal year selection, GAAP or tax-basis accounting, and cadence of reporting reduces those suspicions. State what financial statements the company will deliver and when, who prepares the tax returns, and who has authority to sign them. If owners will have rights to view books and records beyond statutory minimums, describe those rights and the method for making requests, including reasonable time, place, and confidentiality conditions. Consider whether the company may charge copying costs or exclude privileged litigation material from inspection. When this section is thin, small frictions turn into accusations, and time that should be spent running the business gets spent in email wars about Excel tabs and invoice folders.
Employment-like rules for owners, while delicate, are vital in owner-operated LLCs. Spell out whether members are employees, independent contractors, or simply owners who take guaranteed payments or draws. Address how compensation, bonuses, and expense reimbursement are set; explain who approves changes; and place reasonable boundaries around outside commitments that compete for time and attention. If non-competition and non-solicitation restrictions are appropriate, tailor them to Michigan’s reasonableness requirements by calibrating duration, geography, and scope to the legitimate interests you need to protect customer goodwill, trade secrets, and specialized training rather than resorting to boilerplate. Courts are far more likely to enforce a targeted restraint tied to the actual business than a sweeping ban that looks punitive. Absent these rules, what begins as a disagreement over hours or draw amounts can metastasize into allegations of disloyalty or stealth competition, poisoning the partnership.
Finally, dissolution and winding-up provisions bring order to the endgame. Businesses end for good reasons as often as for bad ones mission accomplished, strategic sale, or a clean pivot to a new venture. When the operating agreement describes only the bare statutory steps, owners are left improvising when emotions are highest. Write a thoughtful dissolution roadmap that states who can propose dissolution, what vote is required, and how assets and liabilities will be marshaled and distributed. Coordinate this with your distribution waterfall so there is no ambiguity about the priority of creditors, members with return-of-capital preferences, and common equity. Specify who will serve as liquidating trustee, how tax matters will be handled in the final year, and how long the company will hold back reserves for contingent liabilities or tax audits. Importantly, confirm that confidentiality, IP ownership, and non-solicitation obligations continue past dissolution. A planned ending is cheaper, faster, and kinder than a forced one.
It is tempting to assume the risks above are edge cases, the sort of problems that happen to other companies. The opposite is true. At some point, each growing LLC collides with at least a few of these stressors: a founder wants to cash out; a lender demands a capital infusion; a co-owner’s life event interrupts the rhythm of contributions and distributions; a strategic acquirer asks for clean IP chains; a big decision divides the room; a customer poaches a star employee; a tax bill surprises the group. The difference between an expensive crisis and a manageable problem is how your operating agreement treats the issue before it arises.
Drafting the clauses is half the work. The other half is internal coherence—making sure the different parts of your operating agreement talk to each other and to the real world. If you promise tax distributions, the banking covenants and cash reserve policy must leave room for those payments. If you create supermajority voting for major decisions, the deadlock mechanism should acknowledge that those very decisions are likeliest to stall. If you authorize indemnification and advancement, you should pair those rights with sensible insurance, including directors and officers or management liability coverage calibrated to an LLC. If your buy-sell relies on life or disability insurance, verify the policies, beneficiaries, and funding mechanics match the agreement’s text, and calendar the annual review. Drafting in isolation creates contradictions; drafting as a system creates reliability.
Michigan-specific practice points deserve mention. While Michigan LLC law gives members broad freedom of contract, there are statutory backstops that you do not want to trip over. Certain fiduciary obligations cannot be eliminated wholesale; they can be shaped and clarified. Certain formalities such as whether your company is member-managed or manager-managed should also appear in the Articles of Organization to align the public record with your internal governance. If your agreement creates multiple classes of units, take care with the language so that distributions, voting, and liquidation preferences are aligned across the document and any equity ledger or cap table you maintain. And because many Michigan LLCs are taxed as partnerships by default, integrating your CPA into the drafting process is not a luxury. The time your lawyer and accountant spend together during drafting is a fraction of what you will spend if their assumptions collide after the first year-end close.
A word about tone and process. The most effective operating agreements are the product of candid conversations. It can feel awkward to talk about divorce, death, deadlock, and discipline while you are still celebrating a launch. Do it anyway. Treat the drafting process as a simulation exercise: walk through the tough hypotheticals while everyone is calm and in good faith. If you cannot agree on a buy-out mechanism or a deadlock remedy when spirits are high, you have learned something essential about the partnership, and it is better to learn it now. An operating agreement that no one reads is not much better than having none; make sure your members understand the key provisions and know where to find the details when stress rises.
None of this is meant to intimidate or to turn a straightforward business into a legal maze. In truth, the clauses discussed above save time and protect relationships precisely because they replace improvisation with pre-commitment. A founder who leaves for a dream job can transition cleanly with a fair price and clear covenants. A company that needs fresh capital can raise it without penalizing those who step up or allowing those who do not to block progress for sport. A disagreement over strategy can move to a decisive mechanism that ends the stalemate while preserving respect. Confidential information stays protected; intellectual property remains where it belongs; financial transparency tamps down suspicion. Even dissolution, when it comes, proceeds with dignity rather than chaos.
If you are forming Michigan LLC or living with an agreement that predates your current reality, use this moment to upgrade. Confirm capital commitments and capital-call rules that match your business’s appetite and risk. Clarify management, voting, and major-decision thresholds. Align distributions with tax realities and adopt a partnership audit playbook. Fortify transfer restrictions and buy-sell events so ownership changes do not become existential threats. Pre-wire deadlock resolution so big decisions cannot be held hostage. Right-size fiduciary duty, exculpation, and indemnification to protect honest actors without giving cover to misconduct. Tidy up confidentiality and IP assignments so value you build stays with the company. Set a predictable reporting cadence and practical inspection rights. Define employment-like expectations for owners and tailor post-separation covenants to what a Michigan court will respect. And write a dissolution path that reads like the last chapter of a well-run story rather than a post-mortem.
The reward for doing this work now is not only fewer lawyer emails later. It is a more resilient business culture, where partners know the rules, accept the tradeoffs, and can focus on customers and product rather than governance drama. That is the quiet superpower of a well-drafted operating agreement: it keeps today’s optimism from becoming tomorrow’s regret.
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Sources:
- Michigan Limited Liability Company Act, MCL 450.4101 et seq., State of Michigan Compiled Laws. https://www.legislature.mi.gov/documents/mcl/pdf/mcl-Act-23-of-1993.pdf
- State of Michigan, Department of Licensing and Regulatory Affairs (LARA), Corporations Division, “Limited Liability Companies (LLCs) – Formation and Filing Guidance.” https://www.michigan.gov/lara/bureau-list/cscl/corps/limited-liability-co
- Internal Revenue Service, Publication 541, “Partnerships,” including rules applicable to LLCs taxed as partnerships. https://www.irs.gov/pub/irs-pdf/p541.pdf
- American Bar Association, Business Law Section, Model/Prototype Operating Agreement Materials and Committee Reports on LLC Governance. https://www.americanbar.org/groups/business_law/resources/business-lawyer/2022-fall/model-form-limited-liability-company-agreement/
- Ribstein & Keatinge on Limited Liability Companies, Wolters Kluwer (treatise addressing operating agreement design, fiduciary duties, and member rights). https://store.legal.thomsonreuters.com/en-us/products/proview-ribstein-and-keatinge-on-limited-liability-companies-sub-30921504
This article is for general educational purposes, reflects common drafting practices for Michigan LLCs, and is not legal or tax advice. For advice about your situation, consult counsel and your tax advisor.