Most business owners form an LLC because they want protection, flexibility, and simplicity. But many skip the most important document the LLC has: the Operating Agreement.

An Operating Agreement is not just paperwork. It's the rulebook that controls what happens when money is made, when owners disagree, or when someone leaves the business.

Unfortunately, many Operating Agreements—especially those created using online templates—contain mistakes that don't show up until there's a dispute. And by the time there's a dispute, the cost to fix them can be enormous.

Here are five of the most common Operating Agreement mistakes we see, and what to do instead.

Mistake #1: No Operating Agreement at All

Many states, including Louisiana, do not require an Operating Agreement to form an LLC. That leads some owners to assume they don't need one when nothing could be farther from the truth. In reality, an Operating Agreement is the single most important document for your LLC that has multiple members.

Without an Operating Agreement, you don't have “no rules.” You have your state's default LLC law running your business.

That matters because default law often:

• Doesn't match how owners actually operate

• Creates rights owners never intended

• Provides weak solutions for disputes

• Makes it harder to remove a bad actor

Fix: Even a single-member LLC should have an Operating Agreement. If you have multiple owners, it is essential.

Mistake #2: “We'll Split Everything 50/50” (Without Defining What That Means)

Owners often agree to split profits 50/50 or 60/40 and assume that settles it.

But what does “split profits” mean?

• Does it mean taxable income?

• Does it mean actual cash distributions?

• Does it mean distributions after debt service?

• Does it mean guaranteed payments to working owners?

This is one of the most common reasons partners start fighting: one owner believes the business is “profitable,” while the other believes there's “no money to distribute.”

Fix: Define:

• How profits and losses are allocated

• When cash distributions will be made

• Whether distributions are required (or discretionary)

• Whether tax distributions are mandatory

Mistake #3: No Plan for the “5 Ds” (Death, Disability, Divorce, Deadlock, Departure)

If your Operating Agreement doesn't plan for the “5 Ds,” you don't have a complete agreement.

Because one of those events will happen eventually.

And when it does, the question becomes:

• Who owns the membership interest now?

• Does the business have to buy it?

• Can the family become an owner?

• What happens if the owners are deadlocked?

Without clear rules, owners end up in expensive litigation—or worse, stuck in business with someone they never agreed to partner with.

Fix: Add clear buy-sell and transfer provisions addressing each of the 5 Ds, including:

• Triggering events

• Valuation method

• Payment terms

• Who can own interests and who cannot

Mistake #4: The Agreement Doesn't Match How the Business Actually Operates

A surprisingly common issue: the Operating Agreement says one thing, but the owners do another.

For example:

• The agreement says it's manager-managed, but no manager was appointed

• The agreement requires unanimous approval for major decisions, but owners make decisions informally

• The agreement requires written consents, but none exist

When the business is operating smoothly, nobody cares. But when a dispute arises, the Operating Agreement becomes the first thing a judge looks at.

And if it doesn't match reality, it becomes a weapon.

Fix: Review and update the agreement regularly—especially after:

• Ownership changes

• New investors

• Major loans

• New lines of business

• Rapid growth

Mistake #5: No Clear Rules for Removing an Owner

Many Operating Agreements describe how owners get in—but not how they get out.

That's a problem, because not every owner remains a good fit.

Sometimes owners:

• Stop working

• Start competing

• Misuse company funds

• Become disruptive

• Refuse to cooperate

Without a removal process, the business may have no practical way to move forward.

Fix: Include:

• Removal provisions for cause

• Buyout terms

• Voting thresholds

• Consequences for misconduct

• Non-compete and confidentiality protections where enforceable

Final Thoughts

A strong Operating Agreement does more than protect the business—it protects relationships. It reduces misunderstandings, prevents disputes, and creates a roadmap for difficult moments.

If your Operating Agreement was created quickly, copied from another business, or hasn't been reviewed in years, it may be time for an update.

The best time to fix a weak Operating Agreement is before you need it.