Your LLC’s articles of organization create the entity. Your operating agreement governs it. Under Minnesota’s Revised Uniform Limited Liability Company Act (Minn. Stat. Ch. 322C), the operating agreement is the single most important document for defining how your business is owned, managed, and — eventually — transitioned or dissolved.
Minnesota does not require LLCs to have a written operating agreement. Chapter 322C will fill in every gap you leave open, applying a complete set of default rules that govern your LLC’s management, distributions, membership changes, and dissolution. The problem is that many of these defaults were designed for the simplest case — and they often do not match what business owners actually intend.
This guide covers the provisions every Minnesota LLC operating agreement should address, explains the Chapter 322C defaults your agreement can override, and identifies the statutory guardrails you cannot change.
Why the Operating Agreement Matters More Than You Think
Consider what Chapter 322C provides if your operating agreement is silent:
| Topic | Chapter 322C Default | What Most Business Owners Expect |
|---|---|---|
| Management authority | Equal vote per member, regardless of ownership percentage (Section 322C.0407) | Voting proportional to ownership |
| Distributions | Equal shares per member — per capita, not proportional to investment (Section 322C.0404) | Proportional to ownership percentage |
| Extraordinary decisions | Unanimous consent required (Section 322C.0407) | Majority or supermajority vote |
| Transfer of interest | Economic interest is freely transferable, but transferee does not become a member (Section 322C.0502) | No transfer without approval |
| Dissolution | Consent of all members, or court order (Section 322C.0701) | Majority vote or specified events |
That first row alone can create serious problems. If you and a partner form an LLC with 80/20 ownership, the statute gives you each one vote — meaning the 20% owner has equal management authority. The second row is equally surprising: distributions split 50/50 regardless of who invested more.
An operating agreement overrides these defaults and replaces them with the terms you actually negotiated.
The Provisions Every Operating Agreement Should Include
1. Management Structure: Who Makes Decisions
This is the threshold question. Chapter 322C recognizes three management structures, and your operating agreement should explicitly select one.
Member-managed (the default). All members participate in management. Each member has equal authority in the ordinary course of business, with majority vote controlling. Extraordinary decisions require unanimity.
- Best for: Small LLCs where all owners are actively involved in operations
- Risk: As the company grows or takes on passive investors, equal management authority for every member can create gridlock
Manager-managed. One or more designated managers (who may or may not be members) handle day-to-day operations. Non-manager members have limited authority — more like corporate shareholders than corporate directors.
- Best for: LLCs with some passive investors, or where a clear operational leader needs authority to act without committee approval for routine matters
- Key provisions to include: Scope of manager authority, what decisions require member approval, how managers are appointed and removed, manager compensation
Board-managed. Chapter 322C permits governance through a board of governors — modeled on the corporate board of directors. The board manages the LLC’s activities, and individual members have no authority to bind the company.
- Best for: Larger LLCs, LLCs with institutional investors, or businesses that want clear separation between ownership and management
- Key provisions to include: Board size, election procedures, meeting and quorum requirements, officer appointments
What your operating agreement should specify:
- The management structure (member-managed, manager-managed, or board-managed)
- What constitutes an “ordinary course” decision versus one requiring special approval
- Voting thresholds for different categories of decisions (simple majority, supermajority, unanimous)
- How managers or governors are appointed, compensated, and removed
- Whether and how the management structure can be changed
2. Capital Contributions and Member Accounts
The operating agreement should clearly document each member’s initial capital contribution and establish rules for additional contributions.
Key provisions:
- Initial contributions. What each member contributed (cash, property, services) and the agreed value
- Additional contributions. Whether members are obligated to make additional capital contributions, or whether contributions are voluntary. If mandatory, specify the mechanism — capital call procedures, notice requirements, consequences of failure to contribute
- Capital accounts. How capital accounts are maintained, adjusted for contributions, distributions, and allocations of profit and loss
- No right to return of contribution. Under Section 322C.0402, a member has no right to be repaid a capital contribution except as provided by the operating agreement. If you want members to have a right to return of capital in certain circumstances, the operating agreement must say so.
3. Allocations of Profit and Loss
The operating agreement should specify how the LLC’s income, gain, loss, and deductions are allocated among members for tax purposes.
The default: Chapter 322C does not directly address tax allocations, but the default distribution rules (per-capita, not proportional) would also apply. Most businesses want profit and loss allocated in proportion to ownership percentages.
What your agreement should address:
- The allocation percentages for each member
- Whether and how allocations change if membership interests change
- Special allocations (if any) and their compliance with the IRC Section 704(b) substantial economic effect requirements
- The treatment of guaranteed payments to members for services or capital
4. Distributions: When and How Owners Get Paid
Distributions are payments from the LLC to its members — the mechanism by which members receive the economic benefit of their ownership.
The Chapter 322C default you must override: Section 322C.0404 provides that distributions are made “in equal shares among members” — per capita, not proportional to ownership or contribution. For any LLC with unequal ownership, this default must be replaced.
Key provisions:
- Proportional distributions. Most operating agreements provide for distributions proportional to each member’s ownership percentage
- Tax distributions. A provision requiring the LLC to distribute enough cash to cover each member’s tax liability on their share of LLC income is essential for multi-member LLCs. Without this, a member could owe taxes on income they never received
- Timing and discretion. Whether distributions are made at regular intervals or at the discretion of the managers or members, and who has authority to approve them
- Priority or preferred distributions. Whether any member receives distributions before others — for example, a preferred return on capital before remaining profits are shared
Statutory guardrail: Section 322C.0405 prohibits distributions that would make the LLC unable to pay its debts as they become due or that would make total liabilities exceed total assets. This restriction cannot be overridden by the operating agreement.
5. Transfer Restrictions: Controlling Who Becomes a Member
Controlling the composition of your ownership group is one of the most critical functions of the operating agreement. Under Chapter 322C’s defaults, a member can freely transfer their economic interest (right to distributions), but the transferee does not become a member with management rights — they receive only the economic interest.
While this default provides some protection, most business owners want more control.
Key provisions:
- Right of first refusal. Before a member can transfer their interest to a third party, the LLC or remaining members have the right to purchase the interest on the same terms
- Consent requirements. Transfers may require the consent of all members, a majority of members, or the managers
- Prohibited transfers. The agreement may prohibit certain transfers entirely — for example, to competitors or to persons who would disqualify the LLC from S-corporation tax treatment
- Permitted transfers. Common exceptions for transfers to family members, trusts for estate planning purposes, or existing members
- Valuation mechanism. How the interest will be valued in the event of a transfer — formula, appraisal, or agreed value. The valuation method is the single most litigated provision in LLC disputes. Be specific.
- Buy-sell triggers. Death, disability, retirement, withdrawal, termination of employment, bankruptcy, divorce — each of these events should be addressed with a clear mechanism for the purchase of the departing member’s interest
6. Member Withdrawal and Dissociation
Chapter 322C addresses what happens when a member leaves the LLC — voluntarily or otherwise.
Key default rules:
- A member may dissociate at any time by express will, but may be liable for wrongful dissociation if the withdrawal violates the operating agreement (Section 322C.0601)
- Dissociation does not automatically entitle the departing member to a distribution (Section 322C.0404)
- A dissociated member’s management rights end, but their economic rights continue until bought out or the LLC dissolves
What your operating agreement should address:
- Whether voluntary withdrawal is permitted, and under what conditions
- The consequences of withdrawal — whether the LLC or remaining members must buy the departing member’s interest, and at what price
- Whether the interest is bought at fair market value or at a discount (minority discount, lack of marketability discount)
- The payment terms — lump sum or installment payments over time
- What happens if a member is expelled for cause (breach of the operating agreement, misconduct, bankruptcy)
7. Fiduciary Duties and the Duty of Loyalty
Chapter 322C imposes fiduciary duties on members in a member-managed LLC and on managers in a manager-managed LLC. These include the duty of loyalty and the duty of care.
What the operating agreement can modify:
Under Section 322C.0110, the operating agreement may:
- Identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable
- Specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified after full disclosure
- Alter the duty of care, except to authorize intentional misconduct or knowing violation of law
What the operating agreement cannot eliminate:
Section 322C.0110 establishes clear limits. The operating agreement may not:
- Eliminate the duty of loyalty, the duty of care, or any other fiduciary duty entirely
- Eliminate the obligation of good faith and fair dealing
- Unreasonably restrict a member’s right to information under Section 322C.0410
- Restrict the right to judicial dissolution under Section 322C.0701
- Restrict the right to bring a derivative action under Sections 322C.0901-0906
These are the statutory guardrails — the provisions that protect members even when the operating agreement is silent or attempts to override them.
Practical considerations:
For LLCs whose members have other business interests, the operating agreement should specifically address competing businesses. May a member own or operate a business that competes with the LLC? Under the default duty of loyalty, this would likely be prohibited. If the members intend to permit outside business activities, the operating agreement should say so explicitly.
8. Decision-Making and Voting
Beyond the basic management structure, the operating agreement should specify how decisions are made across different categories.
Consider establishing different voting thresholds for:
| Decision Category | Suggested Threshold |
|---|---|
| Ordinary course of business | Manager authority (or majority of members) |
| Hiring/firing key employees | Manager authority with member notification |
| Contracts above a specified dollar amount | Majority or supermajority of members |
| Taking on debt | Supermajority of members |
| Admitting new members | Unanimous consent |
| Amending the operating agreement | Supermajority or unanimous |
| Selling substantially all assets | Unanimous consent |
| Merging, converting, or dissolving | Supermajority or unanimous |
Deadlock provisions: For 50/50 LLCs or LLCs where deadlock is a realistic risk, the operating agreement should include a deadlock resolution mechanism — mediation, arbitration, buy-sell trigger, or a designated tie-breaker.
9. Dissolution and Winding Up
Chapter 322C provides that an LLC dissolves upon:
- An event specified in the operating agreement
- The consent of all members
- The passage of 90 consecutive days with no members
- A court order on certain grounds (Section 322C.0701)
What your operating agreement should specify:
- Triggering events. What events, beyond the statutory defaults, trigger dissolution — for example, the death or withdrawal of a key member, the failure to achieve certain business milestones, or a supermajority vote
- Alternatives to dissolution. The operating agreement can provide that events which would otherwise trigger dissolution instead trigger a buyout or other restructuring. This is often preferable — dissolution and winding up is disruptive and may not serve the members’ interests
- Winding up procedures. How the LLC’s affairs will be wound up, who is responsible for the process, the order of distribution (creditors first, then return of capital, then distribution of remaining assets)
10. Indemnification and Limitation of Liability
The operating agreement should address whether and to what extent the LLC will indemnify its members, managers, and officers for liabilities incurred in connection with LLC business.
Key provisions:
- Scope of indemnification — what actions and circumstances are covered
- Exceptions — no indemnification for intentional misconduct, fraud, or knowing violation of law
- Advancement of expenses — whether the LLC will advance legal fees before a final determination of the member’s right to indemnification
- Limitation of liability — whether members and managers are personally liable to the LLC or other members for monetary damages (Section 322C.0110 limits what can be eliminated)
Common Operating Agreement Mistakes
Using a generic template without Minnesota customization. Templates designed for Delaware LLCs or based on general LLC principles will not account for Chapter 322C’s specific default rules. Minnesota’s per-capita distribution default alone can create serious problems if the template does not address it.
Failing to address the buy-sell. The most common source of LLC litigation is a dispute over the departure of a member — death, disability, retirement, or disagreement. If your operating agreement does not specify how the departing member’s interest will be valued and purchased, you are setting the stage for expensive litigation.
Ignoring the tax distribution obligation. In a multi-member LLC, members owe individual income tax on their allocated share of LLC income, whether or not they receive a distribution. Without a mandatory tax distribution provision, a member could face a tax bill on income the LLC retained.
Setting it and forgetting it. Your business will change — new members, new activities, new financing, new challenges. The operating agreement should be reviewed and updated whenever there is a significant change in the business or its ownership.
Overlooking the Section 322C.0110 guardrails. Attempting to eliminate fiduciary duties, restrict information access, or limit the right to judicial dissolution beyond what the statute permits will result in unenforceable provisions — and may create a false sense of security.
Frequently Asked Questions
Is an operating agreement required for a Minnesota LLC?
No. Minnesota does not require a written operating agreement. However, operating without one means your LLC is governed entirely by Chapter 322C’s default rules — including per-capita distributions, equal management authority regardless of ownership percentage, and unanimous consent for extraordinary decisions. For any LLC with more than one member, a written operating agreement is not optional from a practical standpoint.
Can a single-member LLC benefit from an operating agreement?
Yes. A single-member LLC operating agreement serves several purposes: it documents the member’s intent to maintain the entity as separate from themselves (supporting the liability shield), it can establish management succession procedures, and it provides a framework if the LLC later takes on additional members.
Can the operating agreement be oral?
Chapter 322C defines an operating agreement as the agreement of the members, whether oral, in a record, implied, or in any combination. An oral agreement is technically valid, but unenforceable provisions are worse than no provisions. If a dispute arises, proving the terms of an oral agreement is extremely difficult. A written operating agreement eliminates ambiguity.
How often should the operating agreement be updated?
Review the operating agreement whenever there is a change in membership, a significant change in the business, new financing, or a change in tax law that affects the LLC’s structure. At minimum, review it every two to three years to ensure it still reflects how the business actually operates.
What happens if the operating agreement conflicts with Chapter 322C?
If a provision of the operating agreement conflicts with a nonwaivable provision of Chapter 322C (Section 322C.0110, subdivision 3), the statute controls. For all other provisions, the operating agreement controls over the statutory defaults. This is why understanding the boundary between waivable and nonwaivable provisions is critical when drafting the agreement.
Can the operating agreement restrict a member from transferring their interest?
Yes. The operating agreement can impose significant restrictions on transfers — consent requirements, rights of first refusal, prohibited transferees, and specific valuation mechanisms. What the agreement cannot do is completely eliminate a member’s economic interest. A member always retains the right to transfer their economic interest (the right to receive distributions), even if the transferee cannot become a member without consent.
Building the Foundation
The operating agreement is where your LLC’s real governance lives. The articles of organization tell the state your LLC exists. The operating agreement tells your members — and, if it comes to it, a court — how the business is supposed to work.
Getting this document right at the outset is significantly less expensive than resolving disputes that arise from gaps in a poorly drafted agreement. For established businesses, the operating agreement should reflect not just where the business is today but where it is headed.
For guidance on drafting or updating your LLC’s operating agreement, contact Aaron Hall at aaronhall.com or call 612-466-0040.
Aaron Hall is a Minneapolis business attorney who represents CEOs and business owners in entity formation, governance, employment law, contracts, and litigation. Named one of America’s Top 50 Lawyers and a Super Lawyers honoree, Aaron combines legal knowledge with a business mindset — holding degrees in both law (J.D., Mitchell Hamline) and marketing (B.A., Concordia).