LLC Default Rules: Voting, Profits, Transfers, and Dissolution

If you form an LLC without an operating agreement, your state’s LLC statute writes one for you by default, and its generic rules cover management authority, voting, profit splits, member exits, information access, fiduciary duties, and dissolution. These default rules are functional, but they are built to apply to any LLC in any industry, which means they regularly produce outcomes that would surprise the owners they govern. The sections below walk through what actually controls your company when nothing else does.

Any Member Can Bind the Company

Every LLC is member-managed unless the articles of organization or an operating agreement specifically elect manager management.¹ In a member-managed LLC, each owner is an agent of the company with equal authority to run it, regardless of capital contribution. A member who owns five percent has the same power to negotiate deals and sign contracts as a member who owns ninety percent.

That creates real exposure. A third party dealing in good faith with any single member can hold the whole LLC to whatever that member committed to. A minority owner could sign a commercial lease, hire employees, or lock the company into a vendor contract, and the LLC is bound even if the other owners never knew the deal was in motion. Switching to manager-managed structure takes an affirmative election in a governing document, so with no agreement, the member-managed default stays in force.¹

One Member, One Vote

Voting follows the same equal-rights principle. Each member gets one vote, regardless of ownership percentage or how much capital they contributed. A simple majority of members controls decisions in the ordinary course of the company’s activities.¹

Anything outside the ordinary course requires unanimous consent of all members, and the same unanimity rule applies to amending the operating agreement and admitting a new member.¹ The line between ordinary and extraordinary sounds clean on paper and gets messy fast. What counts as ordinary for a two-person consulting firm looks different from what counts for a real estate holding company. Without an operating agreement defining the boundary, you’re hoping a court agrees with your reading of it.

The unanimity rule also hands every member a veto. In a two-member LLC with equal ownership, each person can block any significant move the other wants to make.

Profits Are Split Equally, Not by Investment

This is the default rule that blindsides the most people. Under the model act, distributions before dissolution go out in equal shares per capita, not in proportion to what each member invested.² If three people form an LLC and one contributes $500,000 while the other two contribute $10,000 each, every distribution splits three equal ways. The $500,000 contributor collects the same check as each $10,000 contributor.

Most owners assume their share of profits will track their financial stake. It doesn’t, unless your state’s LLC act specifically ties distributions to capital accounts. Some states have departed from the model act on this point, but equal shares is the baseline. The model act also deliberately leaves loss allocation out of the statute, pushing it over to tax and accounting rules.³

No member can demand a distribution on any particular timetable. The LLC has to decide to make one first, and a member’s departure doesn’t automatically trigger a payout.²

You Can’t Force a Buyout When You Leave

Dissociation is the legal word for a member leaving while the company continues. You can dissociate voluntarily by giving notice of your intent to withdraw. Death, bankruptcy, and other events cause dissociation by operation of law.

Here is where the absence of an operating agreement really traps people: dissociation under the default rules does not entitle you to a buyout. The model act has no provision requiring the LLC or the remaining members to purchase your interest.² You become, in effect, a transferee of your own interest. You lose management and voting rights but keep the right to receive distributions whenever the company decides to make them. If the remaining owners never declare a distribution, you get nothing.

A member who wants out has no right to force a sale, no right to compel a distribution, and no real leverage to negotiate an exit price. The only alternatives are finding a buyer willing to take a passive economic interest with no governance rights, or asking a court to dissolve the entire company.

Transfers Move the Money, Not the Seat

LLC statutes are built on what’s called the pick-your-partner principle: you chose your co-owners, and no one can force new people into that relationship without your agreement. Under the default rules, a member can freely transfer economic rights, meaning the right to receive distributions. The transfer gives the recipient no voice in running the company and no access to the books.⁴

To actually become a member with full governance rights, the transferee needs unanimous consent of every existing member. Without that consent, the recipient is a passive holder of whatever distributions the LLC chooses to pay, with no vote, no inspection rights, and no management role.⁴ The transferring member keeps all other membership rights and obligations, including fiduciary duties, even after the transfer. The transfer itself does not dissociate the member or dissolve the LLC.

Default Duties Members Owe Each Other

Members in a member-managed LLC owe each other two fiduciary duties by default: loyalty and care.

The duty of loyalty has three components. A member must turn over to the company any profit or benefit derived from the company’s activities or property. A member cannot deal with the company on behalf of someone whose interests conflict with the LLC’s. And a member cannot compete with the company before it dissolves.⁵ The no-compete component is broad. If you run a landscaping LLC with a partner and start a separate landscaping business on the side, you’ve breached the duty of loyalty even if you never took a client from the first company.

The duty of care requires a member to act the way a reasonable person in a similar position would, in a manner the member honestly believes serves the LLC’s best interests. The business judgment rule protects decisions made in good faith on reasonable information even if they turn out badly.⁵

Every member also owes the contractual obligation of good faith and fair dealing. That isn’t a fiduciary duty, but it stops members from using technical compliance with the statute or agreement to defeat the legitimate expectations of their co-owners.

Access to Company Information

Every member of a member-managed LLC can inspect and copy the company’s records during regular business hours as long as the information relates to that member’s rights and duties. The LLC must also share material financial and operational information with members proactively, without being asked.⁶

The duty runs both ways. Each member must share information they have about the company’s condition that would be material to how other members exercise their rights. If you learn a major client is about to pull a contract, you can’t sit on that while your co-owner makes decisions on stale revenue projections.

In a manager-managed LLC, non-manager members have narrower access. They can still obtain information, but they have to show a purpose connected to their interest as a member, make a written request describing what they want and why, and the company has ten days to respond.⁶

Federal Tax Treatment by Default

The IRS applies its own defaults independent of state law. A multi-member LLC is automatically taxed as a partnership unless it files Form 8832 to elect corporate treatment.⁷ Partnership taxation means the LLC itself pays no federal income tax; income, deductions, and credits pass through to the members, who report them on their individual returns.

A single-member LLC is treated as a disregarded entity, meaning it doesn’t exist for income tax purposes. The sole owner reports the LLC’s activity on their personal return.⁸ A disregarded single-member LLC still counts as a separate entity for employment tax and certain excise tax purposes, so it needs its own EIN if it has employees.

The tax defaults interact with the governance defaults in a specific way: without an operating agreement specifying how profits are allocated, the IRS may default to equal allocations that don’t reflect the economic deal the owners thought they were making.

How the Company Ends

An LLC dissolves and must wind up its affairs when any of these occurs: an event specified in the operating agreement, unanimous consent of all members, the passage of 90 consecutive days with no members, a court order, or administrative dissolution by the state.⁹

Judicial dissolution matters most when members can’t agree on anything. A court can order dissolution if the company’s activities are unlawful, if it’s no longer reasonably practicable to carry on the business under the governing documents, or if those in control have acted in a manner that is oppressive and directly harmful to the member seeking relief.⁹ The “reasonably practicable” standard is where most contested dissolutions are fought. Courts generally look at whether members are deadlocked, whether anything can break the deadlock, and whether the company can still function.

Once dissolution happens, assets are distributed in a fixed statutory order. Outside creditors first. Then any distributions members were owed but never paid. Then return of members’ capital contributions. Anything left goes to members based on their distribution rights, which under the default rules means equal shares.¹⁰

Protections an Agreement Can’t Waive

Some default rules aren’t really defaults. They’re a floor. Even with a signed operating agreement, members can’t eliminate the fiduciary duties, though they can modify them within certain bounds. They can’t eliminate the obligation of good faith and fair dealing. They can’t unreasonably restrict a member’s right to information. And they can’t strip a court of the power to order judicial dissolution when the statutory grounds are met.¹¹

If you ever negotiate an operating agreement and a co-owner pushes a clause eliminating all fiduciary duties or cutting off your access to the books, that clause is unenforceable whether or not you sign it. These core protections apply to every LLC, including the one you’re running right now without an agreement.

1
Bureau of Indian Affairs. Uniform Limited Liability Company Act (2006) – Section 407
2
Bureau of Indian Affairs. Uniform Limited Liability Company Act (2006) – Section 404
3
Revised Uniform Limited Liability Company Act. Revised Uniform Limited Liability Company Act (2006) – Section 404 Comment
4
Revised Uniform Limited Liability Company Act. Revised Uniform Limited Liability Company Act (2006) – Section 502
5
Revised Uniform Limited Liability Company Act. Revised Uniform Limited Liability Company Act (2006) – Section 409
6
Revised Uniform Limited Liability Company Act. Revised Uniform Limited Liability Company Act (2006) – Section 410
7
Internal Revenue Service. Limited Liability Company (LLC)
8
Internal Revenue Service. Single Member Limited Liability Companies
9
Uniform Limited Liability Company Act. Uniform Limited Liability Company Act (2006) – Section 701
10
The Tax Adviser. Dissolution of an LLC
11
Revised Uniform Limited Liability Company Act. Revised Uniform Limited Liability Company Act (2006) – Section 110