Under the Mississippi Limited Liability Company Act, an LLC is not required to have a written operating agreement. The statute expressly provides that an operating agreement may be oral, written, or implied, and many Mississippi LLCs operate for years without ever committing their governance arrangements to paper.^[1] This is a mistake. An LLC without a written operating agreement is governed by the default rules of the LLC Act—rules that were designed as a generic fallback, not as a tailored governance structure for any particular business. In our experience, the default rules rarely reflect what the members actually intended, and the absence of a written agreement inevitably creates confusion, disputes, and expense when disagreements arise.

Why the Default Rules Are Not Enough

The Mississippi LLC Act's default rules cover the fundamental aspects of LLC governance: management structure, member voting rights, allocation of profits and losses, distributions, transfer of membership interests, and dissolution. But these defaults are blunt instruments. For example, the default rule for a member-managed LLC gives each member equal management authority regardless of ownership percentage—meaning a 5 percent member has the same management authority as a 95 percent member. The default profit-and-loss allocation is based on each member's percentage of contributions, which may not reflect the economic deal the members actually agreed to. And the default rules for transfer of membership interests may be more or less restrictive than the members intended.^[2]

The operating agreement is the mechanism by which the members can replace these defaults with rules that match their actual understanding. Without a written agreement, proving what the members "really intended" becomes an exercise in memory, credibility, and litigation expense—none of which serves anyone's interests.

Essential Provisions

Every Mississippi LLC operating agreement should address, at minimum, the following provisions.

Capital contributions and ownership percentages. The agreement should clearly state each member's initial capital contribution, the ownership percentage that corresponds to each contribution, and the procedures for additional capital contributions. If some members are contributing services rather than capital, the agreement should specify the value attributed to those services and the ownership interest received in exchange.

Management structure. The agreement should specify whether the LLC is member-managed or manager-managed, and should define the scope of management authority. In a manager-managed LLC, the agreement should identify the initial managers, specify how managers are appointed and removed, and delineate which decisions require manager approval versus member approval. Major decisions—such as selling substantially all assets, admitting new members, or incurring debt above a specified threshold—typically require a member vote even in a manager-managed LLC.

Profit and loss allocation. The agreement should specify how profits and losses are allocated among the members. The simplest approach is to allocate in proportion to ownership percentages, but more complex arrangements—such as preferred returns, waterfall distributions, or special allocations—are common in multi-member LLCs and must be documented carefully to comply with the partnership tax rules under Subchapter K.^[3]

Distribution provisions. The agreement should address when and how distributions are made. Are distributions mandatory or discretionary? If discretionary, who decides? At a minimum, the agreement should require distributions sufficient to cover each member's income tax liability on allocated income (so-called "tax distributions"), ensuring that members are not required to pay tax on income they have not received.

Transfer restrictions. The agreement should specify whether and how membership interests can be transferred. Most closely held LLCs restrict transfers to prevent unwanted outsiders from becoming members. Common provisions include a right of first refusal (requiring the selling member to offer the interest to the LLC or the other members before selling to a third party), restrictions on transfers to competitors, and requirements that any transferee agree to be bound by the operating agreement.

Buyout provisions. The agreement should address what happens when a member wants to leave—voluntarily or involuntarily. This includes the events that trigger a buyout (death, disability, retirement, termination for cause), the valuation methodology for the departing member's interest, the payment terms (lump sum vs. installments), and any non-compete or non-solicitation obligations. These provisions are among the most important in the agreement and the most frequently litigated when they are absent or ambiguous.

Dissolution provisions. The agreement should specify the events that trigger dissolution of the LLC and the procedures for winding up its affairs. Without dissolution provisions, the default statutory rules apply—which may include dissolution upon the dissociation of any member, a result that many LLC members would not choose if given the option.^[4]

Dispute resolution. The agreement should include a mechanism for resolving disputes among the members—mediation, arbitration, or a specified judicial forum. Including a dispute resolution provision before any disputes arise is far more effective (and far less expensive) than trying to agree on a process after a dispute has already escalated.

Fiduciary Duties and the Operating Agreement

As we discussed in our prior post on fiduciary duties in Mississippi LLCs, the LLC Act allows the operating agreement to modify the default fiduciary duties that members and managers owe to each other. This flexibility is one of the LLC's advantages, but it also means that the operating agreement is the place where fiduciary expectations are established. An operating agreement that is silent on fiduciary duties leaves the members with the statutory defaults, which may be broader or narrower than what the members intended.

Practical Recommendations

For existing LLCs that lack a written operating agreement, now is the time to create one—before a dispute arises that forces the members to litigate what they thought they had agreed to. For new LLCs, the operating agreement should be drafted and signed before the business begins operations. The cost of a well-drafted operating agreement is a fraction of the cost of a single dispute over management authority, profit allocation, or buyout terms. Our firm regularly drafts and reviews operating agreements for Mississippi LLCs across all industries, and we tailor each agreement to the specific needs and objectives of the members.^[5]