LLC operating agreementsLLC Operating Agreements
An operating agreement sets the internal rules among an LLC’s members, between members and managers, and between members and the company; it is roughly the equivalent of a corporation’s “bylaws plus shareholders’ agreement.” Illinois LLCs are governed by the Limited Liability Company Act (805 ILCS 180). The Articles of Organization filed with the Secretary of State record only basic information; the arrangements that really matter, such as contributions, distributions, management and withdrawal, are set out in the operating agreement. For the formation steps, see Forming an LLC in Illinois.
Illinois law: what the agreement can and cannot cover
Under 805 ILCS 180/15-5(a), the members of an LLC may enter into an operating agreement to regulate the company’s affairs and the relations among the members, managers and the company; to the extent the agreement does not provide otherwise, the Act governs. The agreement may change most of the Act’s default rules, but 15-5(b) lists matters that cannot be changed by agreement, chiefly:
- unreasonably restricting a member’s right to information and access to company records (Sections 1-40 and 10-15);
- changing the right to expel a member in certain statutory circumstances, or changing the requirement that the company be wound up in the circumstances described in Section 35-1(a)(4)–(6);
- restricting a member’s power to dissociate (Section 35-50), although the agreement may specify which dissociations are “wrongful”;
- eliminating or reducing the statutory implied obligation of good faith and fair dealing, although the agreement may set standards for measuring performance;
- restricting the statutory rights of third parties other than members, managers and transferees, changing choice-of-law rules, or changing powers a court has under the law, among others.
As to fiduciary duties, 15-5(c)–(e) allows the agreement, in clear and unambiguous terms, to limit or eliminate certain fiduciary duties, to set procedures for approving related-party transactions after full disclosure, and to limit liability for money damages; but it cannot authorize intentional misconduct or knowing violations of law. Sections 15-5(f)–(h) also provide that the company is bound by the agreement even if it did not sign it, that a new member is deemed to have assented to the agreement, and that the agreement may be entered into before, at the same time as, or after the Articles of Organization are filed.
Without an operating agreement: the statutory default rules
| Matter | Statutory default rule | What investors often expect |
|---|---|---|
| Management structure | Member-managed unless the agreement expressly provides for management by managers (15-1(a)) | The largest investor is in charge |
| Day-to-day decisions | In a member-managed company, each member has equal management rights, and ordinary matters are decided by a majority of the members by headcount (15-1(b)) | Voting in proportion to ownership |
| Matters requiring consent of all members | Amending the operating agreement or Articles of Organization, admitting a new member, disposing of all or substantially all of the company’s property, consenting to dissolution, merger or conversion, among others (15-1(d)) | A majority owner can decide alone |
| Distributions before dissolution | Shared equally per capita (25-1(a)) | Profits shared in proportion to contributions |
| Transfer of interests | A distributional interest may be transferred, but a member’s other rights and powers may be transferred only if authorized by the agreement or with the consent of all other members (30-1) | Free to sell to anyone |
As a result, in an LLC where two people contributed 70/30, without a written agreement the 30% party may end up on equal footing with the 70% party in voting and distributions. This is especially harmful to the E-2 ownership and control analysis.
Provisions an operating agreement should include
- Contributions: the amount, form (cash, equipment, intellectual property, etc.) and timing of each member’s contribution, and the basis for valuing non-cash contributions;
- Ownership percentages: state each member’s percentage interest and how it corresponds to contributions, avoiding conflicts with the Articles of Organization and bank records;
- Profits, losses and distributions: in what proportions and when distributions are made, and whether operating funds are retained first; tax arrangements for distributions should be coordinated with your accountant;
- Management: member-managed or manager-managed, how managers are appointed and removed and what authority they have, and which matters require a member vote;
- Voting: by ownership percentage or per capita, the approval thresholds for major matters, and procedures for written consent in lieu of a meeting;
- Additional contributions: who provides additional funds when the company needs them, and the consequences of not contributing (dilution, loans, etc.);
- Transfer restrictions: rights of first refusal, transfers requiring consent, and how interests are handled on inheritance and divorce;
- Withdrawal and buyout: when a member withdraws, dies or becomes incapacitated, who buys the interest, how the price is determined and how it is paid;
- Deadlock: when two members each hold 50% and disagree, how the dispute is resolved (mediation, a third-party decision, buy-sell provisions, etc.);
- Dissolution and winding up: events of dissolution, the order of liquidation and distribution of remaining assets;
- Other: non-competition and conflicts of interest, records and information, dispute resolution and governing law.
How it connects to E-2
E-2 cases are reviewed by the U.S. Department of State under the Foreign Affairs Manual, 9 FAM 402.9, and the operating agreement is the main basis on which consular officers assess the following issues. For the basic E-2 requirements, see the E-2 section.
Ownership percentages and operational control
- An enterprise’s nationality is determined by the nationality of its individual owners, and nationals of the treaty country must own at least 50% of the enterprise; shares held by U.S. lawful permanent residents are not counted (9 FAM 402.9-4).
- The investor must “develop and direct” the enterprise, usually shown by owning at least 50% of the interests, or alternatively by operational control through a managerial position or other corporate arrangement; but merely holding a managerial title without actually controlling the enterprise does not qualify (9 FAM 402.9-4, 402.9-6(F)).
- In a 50/50 joint venture where both parties retain full management rights, each is generally considered to have control (often called “negative control”); but where three or more parties hold equal shares, none of them can obtain control through ownership alone (9 FAM 402.9-6(F)). An agreement for a 50/50 structure should therefore spell out both parties’ management and veto rights.
Spouses owning jointly, and joint ventures with non-treaty nationals
9 FAM has no specific provision on joint ownership by spouses. Under the rule that an enterprise’s nationality is determined by the nationality of its individual owners, only a share held by a spouse who also has the treaty country’s nationality can be combined with the investor’s share and counted as treaty-national ownership; if the spouse is a Chinese national (for example), a U.S. permanent resident, or of another nationality, that share is not counted. When spouses invest together, the agreement should state each spouse’s share separately rather than simply saying the interest is “held jointly by husband and wife.” In a joint venture with a partner who is a Chinese national or of another non-treaty nationality, the treaty nationals’ combined ownership must still reach 50%, and the operational-control arrangements should be clearly written into the agreement.
E-2 applications for employees
When the enterprise applies for E-2 status for an employee, the employee must have the same treaty nationality as the enterprise, the enterprise (or its principal owners) must maintain E status in the United States or reside outside the United States, and the employee must hold an executive or supervisory position or have special skills essential to the enterprise (9 FAM 402.9-7). A later change in ownership may change the enterprise’s nationality and affect employees’ visas, so the transfer provisions should take this into account.
Funds at risk and irrevocably committed
An E-2 investment must place the funds at risk, so that they could be partially or entirely lost if the business fails; the commitment must be real and irrevocable; and funds merely held in a bank account and not yet put to use do not constitute an investment (9 FAM 402.9-6). Therefore:
- the agreement should not provide that contributions can be withdrawn unconditionally at their original value “if the visa is refused or at any time,” or the funds may be considered not at risk;
- if the investment is conditioned on visa approval, the approach recognized in 9 FAM 402.9-6(B)(d) is that an acquisition conditioned on issuance of the E-2 visa can still be an irrevocable investment where the funds are placed in escrow and released or transferred once the condition is met. This must be designed in the purchase agreement and escrow agreement, not by writing a refund promise into the operating agreement;
- commercial loans secured by the enterprise’s assets do not count toward the investment (9 FAM 402.9-6(B)), so the contribution provisions in the agreement must match the actual source of funds.
Distributions and “non-marginality”
A marginal enterprise is one that does not have the present or future capacity to generate more than enough income to provide a minimal living for the investor and his or her family, unless it can make a significant economic contribution; the projected capacity should generally be realized within five years from the date the enterprise begins normal business activity (9 FAM 402.9-6(E)). The distribution arrangements in the agreement should be consistent with the profit, hiring and reinvestment plans in the business plan; see E-2 business plans.
Taxes: principles only
Under IRS rules, an LLC that has not elected a different classification is by default taxed as a partnership if it has two or more members and disregarded as an entity separate from its owner if it has a single member; foreign persons cannot be S corporation shareholders; a single-member LLC wholly owned by a foreign person has filing obligations such as Form 5472; and a partnership with foreign members may also have withholding and reporting obligations. The distribution and capital account provisions of the operating agreement affect the tax treatment. Our firm does not provide case-specific tax advice; please work with your accountant, and see the tax section.
Self-check checklist
Common misconceptions
- “A template downloaded online is enough.” Generic templates usually do not address the E-2 nationality, control and at-risk investment requirements, and may not be consistent with Illinois law.
- “I put in more money, so naturally I’m in charge.” Without an agreement, Illinois defaults to per capita voting and equal distributions.
- “Adding a refund if the visa is not approved protects the investor better.” This may weaken the argument that the funds are “at risk”; it should be handled through an escrow arrangement.
- “We can adjust the ownership later.” A change in ownership after filing for E-2 may change the enterprise’s nationality or control, affecting renewals and employees’ visas.
How we can help
- Drafting or reviewing operating agreements based on Illinois law and your E-2 plan;
- Designing ownership and control structures for multiple investors, spouses investing together, or joint ventures with partners of non-treaty nationality;
- Coordinating the operating agreement, purchase agreement, escrow arrangements and commercial lease together as evidence for the E-2 application;
- Working with your accountant on tax classification and distribution arrangements.
Frequently asked questions
Does Illinois require an LLC to have an operating agreement?
The law does not require one, and it does not need to be filed with the Secretary of State. But without an agreement the statutory default rules apply, and an operating agreement is usually requested for an E-2 application and to open a bank account, so in practice it is indispensable.
I am the only member. Do I still need an operating agreement?
We recommend having one. A single-member agreement can set out the management structure and what happens if the member dies or becomes incapacitated, and it is also the document that shows banks and consular officers that you own and control 100% of the enterprise.
My spouse and I each own 50%, and my spouse is a Chinese national. Can I apply for E-2?
A Chinese-national spouse’s share does not count as treaty-national ownership, so treaty nationals hold only 50%. A two-party 50/50 structure can generally be considered control where both parties retain full management rights, but whether the nationality and control requirements are met must be evaluated in light of the overall structure, and it is best planned at formation.
Can the operating agreement be signed in Chinese?
The Illinois LLC Act does not regulate the language of the agreement, but documents submitted to a U.S. consulate and to banks usually need to be in English. A common approach is to make the English version controlling and attach a Chinese translation so the members can understand it.
Can we sign the operating agreement before the visa is approved?
Yes. The agreement can be entered into before, at the same time as, or after the company is formed. E-2 generally requires that the funds already be invested or in the process of being invested at the time of application, so the company formation and operating agreement are generally completed before filing.
What if we want to bring in a new partner later?
By default, admitting a new member requires the consent of all members, and the agreement can set a different procedure. For an E-2 investor, you should first evaluate whether treaty-national ownership will still reach 50% and whether control will change after the new member joins.
Official sources
- 805 ILCS 180/15-5 (operating agreement)
- 805 ILCS 180/15-1 (management of an LLC)
- 805 ILCS 180/25-1 (distributions before dissolution)
- 805 ILCS 180/30-1 (transfer of distributional interest)
- U.S. Department of State, 9 FAM 402.9 (treaty traders and investors)
- IRS Publication 3402 (taxation of LLCs)
Related reading
- Forming an LLC in Illinois
- EIN, bank accounts and tax registration
- Commercial lease essentials
- E-2 section
- E-2 through a third-country nationality
Preparing to form a company for E-2, or already have one but unsure whether your operating agreement will hold up to scrutiny? We can plan the company documents and the visa application together. Book an attorney consultation, or call (312) 519-1115.
This page is general information, not legal or tax advice. Company formation and commercial leases are governed by state law and the rules differ by state; government fees and forms are as currently published by the Secretary of State, the IRS and other official sources; visa outcomes are decided by the U.S. Department of State and immigration agencies and depend on the specific facts. Our firm advises on Illinois, New York and Massachusetts law.