Minnesota Operating Agreement Must-Haves

When the operating agreement is silent, what does Minnesota law fill in?

The defaults in Chapter 322C are designed to fill gaps for any conceivable LLC, from a one-person consulting shop to a 30-member real estate venture. Because they have to work for everyone, they almost never reflect the actual deal between specific co-founders.

Three defaults catch business owners off guard:

• Profits are split per capita, not by ownership. Under Minn. Stat. § 322C.0404, subdivision 1, distributions before dissolution “must be in equal shares among members and dissociated members.” A founder who put in 90 percent of the capital shares profits equally with a co-founder who put in 10 percent unless the operating agreement says otherwise.
• Each member has one vote, regardless of contribution. Minn. Stat. § 322C.0407, subdivision 2, gives each member of a member-managed LLC equal management rights and decides ordinary matters by majority of members.
• There is no buyout when someone leaves. Minn. Stat. § 322C.0404, subdivision 2, states flatly that “a person’s dissociation does not entitle the person to a distribution.” A member who quits, dies, or is expelled keeps an economic interest and gets nothing in cash unless the agreement requires a buyout.

A reader who wants the practical version: if you formed an LLC and never wrote an operating agreement, the law has already decided who controls the company and how the money moves. The agreement is your chance to override those decisions before a dispute makes them permanent.

How does Minnesota law treat the operating agreement?

Chapter 322C governs Minnesota LLCs and replaced the older Chapter 322B effective for all LLCs by January 1, 2018. Under Minn. Stat. § 322C.0102, subdivision 17, an operating agreement is “the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company.”

Two consequences flow from that definition:

1. The form does not matter. The agreement can be written, oral, or inferred from conduct. A written agreement is strongly preferred because it is the only practical way to prove what was agreed.
2. It must be of all the members. A document one member drafted and never circulated is not the operating agreement. Every member needs to sign or assent. When new members join later, the agreement should require their written joinder.

Minn. Stat. § 322C.0110, subdivision 1, lists what the agreement governs: relations among the members, the rights and duties of any manager or governor, the company’s activities, and the procedure for amending the agreement itself. Almost everything inside those four buckets is open to negotiation.

What can a Minnesota operating agreement override?

The starting point is broad authority. Subject to a closed list of restrictions enumerated in subdivision 3 of section 322C.0110, the operating agreement can rewrite essentially every default rule in Chapter 322C. In practice, well-drafted Minnesota operating agreements override the defaults on:

• Capital and profit splits. Replace the per-capita default with allocations by ownership percentage, classes of units, or waterfall distributions to investor members. See our note on capital contribution clauses in multi-member operating agreements.
• Voting and management. Choose member-managed, manager-managed, or board-managed structure; weight votes by ownership; require supermajority or unanimous consent for major decisions; create tie-break provisions in 50/50 LLCs.
• Restrictions on transfer. Block sales, gifts, or pledges of membership interests without consent. Include a buy-sell that triggers on death, divorce, bankruptcy, or termination of employment.
• Capital calls and remedies for failure to fund. Specify when additional contributions can be required and what happens if a member does not pay. See capital calls and default remedies in LLCs.
• Buyout on death, disability, or withdrawal. Set a price formula, payment terms, and life-insurance funding so the company is not forced to liquidate to pay an estate.
• Fiduciary duties. Within the limits of subdivisions 4 through 7 of section 322C.0110, restrict the duty of loyalty (for example, by approving specific competing activities) and define the standard of care for managers.
• Indemnification. Set the scope and procedure for indemnifying members, managers, and officers against claims arising from company business.

The drafting principle: any default that does not match your business deal needs to be replaced explicitly. Silence keeps the default.

What can the operating agreement not override?

Eleven items in section 322C.0110, subdivision 3, are off-limits. The operating agreement may not:

1. Vary the LLC’s capacity to sue and be sued in its own name. The company is a legal person; the agreement cannot change that.
2. Vary the choice-of-law rule under section 322C.0106. The agreement cannot displace the statutory rule that determines what law governs the LLC.
3. Vary the power of the court under section 322C.0204. The court’s authority over statements of authority cannot be contracted away.
4. Eliminate the duty of loyalty or the duty of care, except within the bounds of subdivisions 4 through 7. Specific conflicts may be approved or excused, but a blanket waiver of all loyalty is not enforceable.
5. Eliminate the contractual obligation of good faith and fair dealing. The agreement may set the standards for performance, but it cannot read out the obligation altogether.
6. Unreasonably restrict the information rights stated in section 322C.0410. Some confidentiality and procedural conditions are fine; an outright denial of a member’s right to see books and records is not.
7. Vary the court’s power to dissolve the company in cases of unlawful or impracticable activities, or where those in control act illegally, fraudulently, or in a manner unfairly prejudicial to a member. This is the remedy for an aggrieved minority owner that the agreement cannot block.
8. Vary the requirement to wind up the LLC’s business after dissolution.
9. Unreasonably restrict a member’s right to sue under sections 322C.0901 to 322C.0906 (direct and derivative actions).
10. Restrict the right to approve a merger, conversion, or domestication of any member who would have personal liability in the surviving entity.
11. Restrict the rights of a person who is not a member, manager, or governor, except as section 322C.0112 allows.

These limits matter most in two situations: drafting a minority-owner protection clause (you cannot waive away the dissolution remedy or the right to sue), and writing aggressive fiduciary-duty waivers (you can narrow the duties, but not erase them). For more on how those duties actually operate, see Minnesota business owner’s rights and fiduciary duty law.

Who runs the LLC if you do not say?

Under Minn. Stat. § 322C.0407, subdivision 1, a Minnesota LLC is member-managed unless the operating agreement expressly says otherwise (the statute uses the phrase “expressly provides” the company is “manager-managed,” “board-managed,” or uses “words of similar import”). Three structures are available:

• Member-managed (the default). Every member has equal management rights. Ordinary business decisions take a majority of the members; matters outside the ordinary course of business and amendments to the operating agreement require unanimous consent.
• Manager-managed. One or more managers run the company. Members elect and remove managers by majority vote. Members still consent to extraordinary acts.
• Board-managed. A board of governors holds management authority, similar to a corporate board. Members elect governors and retain consent rights over major actions.

Two practical points. First, “equal management rights” means one member, one vote, regardless of ownership percentage. A 90/10 LLC operates 50/50 at the management level under the default. Second, the unanimity rule for “outside the ordinary course” can paralyze a multi-member LLC: any single holdout can block the deal. Most well-drafted agreements substitute a defined supermajority and a list of decisions that require it. For the broader question of how authority lines work, see authority limits for managers in LLC structures.

How are profits split if you do not say?

The default is per capita. Minn. Stat. § 322C.0404, subdivision 1, requires distributions before dissolution to be made “in equal shares among members and dissociated members.” Two members split 50/50 even if one owns 99 percent. Four members split 25 percent each, regardless of contribution.

That rule is rarely what founders intended. The fix is to define each member’s distribution percentage in the operating agreement and to address several adjacent questions the statute leaves open:

• Allocations of taxable income. A pass-through LLC must allocate items of income, gain, loss, and deduction among the members. The operating agreement should follow the partnership tax allocation rules that govern pass-through LLCs. The broader tax framework involves federal pass-through versus C-corporation election decisions on top of these allocations.
• Interim distributions. Subdivision 2 of section 322C.0404 gives no member the right to demand a distribution before dissolution. Without an agreement, a member who needs cash to pay tax on phantom income has no recourse. A tax-distribution clause solves this.
• Form of distributions. Subdivision 3 says no member can demand a distribution other than in money. If the LLC holds illiquid assets, the agreement should address how in-kind distributions are valued and approved.
• Economic versus voting rights. A common refinement separates the right to vote from the right to receive money, useful for bringing in passive investors or transferring economic interests to family members. See clarifying economic versus voting rights in LLCs.

How Minnesota law treats a transfer of a membership interest

Under Minn. Stat. § 322C.0502, a member can transfer the economic side of their interest at will. The transfer does not, by itself, dissociate the member or dissolve the company, and subdivision 1 specifies that the transferee is not entitled to “participate in the management or conduct of the company’s activities.” The buyer becomes what the statute calls a transferee: entitled to the seller’s distributions, but not to vote, attend meetings, or inspect records.

Two consequences:

• Without a transfer restriction, members can sell their economic interest to anyone. A spouse, a creditor, a competitor, an outsider with no relationship to the company. The buyer becomes a co-owner of the cash flows, and the remaining members are stuck with that person until the company dissolves or the agreement is amended.
• Restrictions in the operating agreement are enforceable, but only against people who know about them. Subdivision 6 says a transfer made in violation of a restriction is “ineffective as to a person having notice of the restriction.” Practical translation: write the restrictions clearly, reference them on any membership-interest certificate, and give notice to any potential transferee.

The standard fix is a buy-sell agreement (often built into the operating agreement) that triggers on death, disability, divorce, bankruptcy, termination of employment, or any attempted transfer. See buy-sell agreements: the exit plan every Minnesota business owner needs and assignability of LLC interests under default law.

How dissociation works under Chapter 322C

In the multi-member LLC operating agreements I review at intake, the dissociation and buyout terms are the section most often left to template language, and the section most often re-litigated when a member actually leaves. The price methodology and payment terms in particular are usually missing or generic. Under Minn. Stat. § 322C.0602, fourteen events cause a person to be “dissociated” as a member. The most common are:

• The member’s express will to withdraw under section 322C.0601, subdivision 1.
• Any event the operating agreement identifies as causing dissociation.
• Expulsion under the operating agreement.
• Judicial expulsion for wrongful conduct, material breach of the operating agreement, or making it not reasonably practicable for the company to continue.
• In a member-managed LLC, the member’s death, incapacity, bankruptcy, or assignment for the benefit of creditors.

Now the trap: dissociation does not entitle the member to a buyout. Section 322C.0404, subdivision 2, says so explicitly. The dissociated person becomes a transferee with the same rights as the buyer of an economic interest: distributions in proportion to whatever the operating agreement set, no vote, no management role. The estate of a deceased member who held 50 percent of an LLC ends up with the right to half the distributions for the rest of the company’s life (or until the agreement provides for a buyout) and no way to force a sale.

A withdrawing member also has potential exposure. Section 322C.0601, subdivision 3, says a member who “wrongfully dissociates” (for example, by withdrawing in breach of an express provision in the operating agreement) is “liable to the limited liability company and, subject to section 322C.0901, to the other members for damages caused by the dissociation.”

Every multi-member Minnesota LLC operating agreement should answer four questions about dissociation:

1. What events trigger a buyout? Death, long-term disability, divorce, bankruptcy, termination of employment, voluntary withdrawal, expulsion, attempted transfer in violation of restrictions.
2. What is the price? Fair market value (with a defined methodology), book value, formula, appraised value, or a fixed schedule.
3. What are the payment terms? Lump sum, installment over a period of years, secured by the interest, with interest at a stated rate.
4. Who buys? The company (entity redemption), the other members (cross-purchase), or a combination. Each has tax and funding consequences. See cross-purchase versus redemption buy-sell agreements and adjusting capital accounts after member withdrawals.

When does the LLC dissolve, and what stops it?

Minn. Stat. § 322C.0701, subdivision 1, lists six events that dissolve an LLC: an event the operating agreement says causes dissolution, the consent of all members, ninety consecutive days with no members, a court order on a member’s application that the activities are unlawful or not reasonably practicable, a court order on a member’s application that those in control are acting illegally, fraudulently, or in a manner unfairly prejudicial to the applicant, or a court order on application of the attorney general.

Two clauses do most of the work in real disputes. Clause (4) (the “not reasonably practicable” standard) reaches deadlock cases, especially in two-member or 50/50 LLCs where the members cannot agree on direction. Clause (5) is the unfairly-prejudicial-conduct ground: a minority member who can prove that those in control are acting illegally, fraudulently, or in a manner unfairly prejudicial to the applicant can ask the court to dissolve the company.

Subdivision 2 gives the court an alternative: instead of liquidating the company, the court “may order remedies other than dissolution, including the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members.” A buyout, in other words, ordered by the court at fair value if the parties cannot reach one on their own.

Because the court’s dissolution power under clauses (4) and (5) cannot be waived in the operating agreement (this is point 7 of the off-limits list above), every multi-member LLC should plan for deadlock and oppression before they happen. The deadlock pattern I see most often in two-member LLCs: the operating agreement requires unanimous consent for everything substantive, which works fine until the day the two members disagree, at which point any decision becomes a hostage to one member’s veto. Common provisions to plan around it: defined deadlock procedures, mediation requirements, deadlock resolution clauses in two-owner LLCs, buy-sell triggers, and supermajority approval for fundamental changes.

For a broader view of how dissolution and member exit fit into the Business Formation lifecycle, the formation hub collects related guides on entity choice, governance, and exit planning.

What records and information do members have a right to see?

Minn. Stat. § 322C.0410 gives different access depending on management form. In a member-managed LLC, the company must furnish, without demand, information that is “material to the proper exercise of the member’s rights and duties,” and must provide other information on request unless the demand is unreasonable. In a manager-managed or board-managed LLC, members must make a written demand stating the purpose; the company has ten days to respond.

The operating agreement can put reasonable conditions on access (confidentiality agreements, copying costs, restricted use of trade-secret materials), but it cannot deny it outright. A member denied access has a statutory right to sue under sections 322C.0901 to 322C.0906, and that right cannot be unreasonably restricted either.

Putting it together

A Minnesota operating agreement is the place to make the deal explicit. Chapter 322C will fill any gap you leave, and the gap-fillers are designed for the average case, not yours. Founders who do not write an operating agreement, or who paste a generic form, end up with: equal profit splits regardless of contribution, equal votes regardless of ownership, no buyout when someone leaves, freely transferable economic interests, and a court-administered dissolution as the only exit when the members fall out.

The best time to write the operating agreement is at formation, when the founders agree on the deal. The second-best time is now, before a dispute makes the statutory defaults the rule of decision. If you’d like a second set of eyes on a specific operating agreement or formation question, email [email protected] with a brief description and any draft documents.