Operating Agreement: 6 Clauses That Are Missing

A client we'll call MERIDIAN wrote to us in a hurry: the bank was asking for the Operating Agreement of his single-member LLC in New Mexico to finish opening the account, and the document he had — a free template downloaded off the internet — fit on a single page. The bank sent it back in 4 days with two questions the template didn't answer: who runs the company, and under which law it operates. MERIDIAN had a piece of paper, but not an Operating Agreement that could survive a single serious question.

The Operating Agreement (OA) is the internal document that states how your LLC works: who's in charge, how money comes in and goes out, what happens if it shuts down. In a single-member LLC it sounds almost redundant — the owner is you and only you — which is why free templates dispatch it in four generic paragraphs. The problem arrives when the bank, the IRS, or your home tax authority reads it: that's when the missing clauses show. Here are the 6 we most often find absent when a client sends us their "already done" OA.

Note: this is operational content based on what we see in real clients, not legal or tax advice. At Devil Club we are not attorneys or tax advisors. For your specific case, check with a qualified professional in your jurisdiction.

Why does the free template fall short?

Free OA templates are written for the simplest possible case and to cover the state minimum. In New Mexico, in fact, the state doesn't even require you to file an Operating Agreement — it's a private document — so the template assumes no one will read it. But people do read it: the bank reads it when opening the account, the accountant who prepares your reports reads it, the counterparty signing a big contract with you reads it, and your home tax authority would read it if it ever asks where the company is run from.

The vulnerable owner is exactly the profile of most of our clients: non-resident, single-member, operating from outside the U.S. For that profile, the OA isn't paperwork: it's the written proof of how the company is organized and of the fact that the owner and the LLC are separate things. What free templates leave out are precisely the clauses that matter to that outside reader. Here they are.

1. Who actually runs it: a manager-managed structure

An LLC can be run by its members (member-managed) or by a designated manager (manager-managed). Free templates almost always check "member-managed" by default and say nothing more. For a single-member LLC operating from abroad, that leaves undocumented the question banks and authorities watch most closely: who makes the decisions, and from where.

The designated-manager clause puts in writing who runs the company, what they can sign and commit to, and how they're replaced. That's what connects the paper to the operational reality — the same principle as economic substance we cover in another post —: the bank wants to know who it's granting access to, and your tax authority, where the company is really run from. A template that's silent here forces you to improvise the answer right when it matters most.

2. A record of capital contributions

When you put your own money into the LLC to start up or cover expenses, that's a capital contribution. In a non-resident single-member LLC this isn't a minor accounting detail: an LLC with a single foreign owner is treated, for IRS purposes, as a disregarded entity, and the transactions between you and your company — what you put in and what you take out — are reportable on Form 5472.

If the OA doesn't require logging each contribution — date, amount, purpose — the filing goes blind: you or whoever prepares the report has to reconstruct after the fact how much you put in and when, from scattered statements. The contributions clause forces you to keep that record from day one. It doesn't save you the report, but it makes it arrive with numbers instead of guesswork.

The Operating Agreement isn't written for the day everything goes well. It's written for the day the bank, the IRS, or your tax authority asks a question — and on that day the document either answers, or leaves you exposed.

3. A documented distributions policy

The flip side of contributions is what you take out: distributions. In a single-member LLC withdrawing money is legitimate and normal, but "I took it because it's mine" is not a record. The distributions clause defines how and when the owner withdraws funds and requires logging it — just like contributions, it's also a reportable movement on Form 5472.

We always work it on a cash basis: it counts the money actually collected and actually withdrawn, with its date. That orderly trail is the support when you have to explain a movement — to the bank or to a tax authority. Without the clause, withdrawals stay as loose transfers with no context, which is exactly what raises the most questions when someone reviews the accounts.

4. Asset separation and indemnification

The core value of an LLC is that it separates your personal assets from the company's. But that separation doesn't hold on its own just by having the entity registered: it holds because of how you operate and what the OA says. The asset-separation clause puts in writing that the LLC's assets and the owner's are distinct, that accounts and expenses aren't mixed, and that the company indemnifies the manager for legitimate acts of management.

It's the clause that backs what many people call the "corporate veil." A caveat: no document provides a shield on its own — if you mix personal and company accounts, the clause won't save you. What it does is align the document with clean operations: separate accounts, separate expenses, company decisions made as the company. The OA puts the rule in writing; you follow it day to day.

5. Orderly dissolution

Almost no free template explains how the LLC is closed, and that's exactly where most clients hurt themselves. Closing badly leaves "phantom debt": a registered agent that keeps billing, an account left open, pending state obligations. The orderly-dissolution clause sets the steps — settle what's owed, distribute what's left, deregister records — so the closing is clean.

In New Mexico there's a nuance worth being clear on: NM has no Annual Report — neither annual nor biennial — so there's no periodic state filing to cancel (we cover it in why NM has no Annual Report). But there is one obligation that doesn't disappear on its own: keeping the registered agent active for as long as the LLC exists. If you close the business but neither formally dissolve nor deregister the RA, the entity stays "alive" and the RA keeps running. The dissolution clause is what reminds you to close that door too.

6. Governing law and dispute resolution

The last clause templates tend to forget is the most boring and the one the bank looks for first: governing law. It states under which law the document is interpreted — for a New Mexico LLC, New Mexico law — and in which forum a dispute is resolved. It sounds like legal filler until a large counterparty, or the bank itself, opens the OA to verify the company is properly formed.

An OA without governing law is an orphan document: it doesn't say under which rules it should be read. For a non-resident owner this weighs double, because you don't have a physical presence in the U.S. that "explains" the company — the document has to do all the work. It's the clause that cost MERIDIAN a second round with the bank by being absent.

How it turned out for MERIDIAN

We rewrote MERIDIAN's OA with all 6 clauses: designated manager, record of contributions, distributions policy, asset separation, orderly dissolution, and New Mexico governing law. The document went from one page to a text that answered the bank's questions without MERIDIAN having to explain anything on his own. The account opened on the next round.

What didn't go "perfectly": about 9 days passed between the bank's first rejection and the rewritten OA, and during that time MERIDIAN had his operation stalled waiting for the account. Had he started with a complete OA, he'd have spared himself the whole round. Rewriting a document under pressure from the bank always turns out slower than writing it properly from the start — the same pattern we see again and again: the free-template shortcut costs more later.

Checklist: does your OA have the 6?

Before you send your Operating Agreement to a bank or file it as "done," check that these six are in place:

• Does it say who runs it and from where? A manager-managed structure with a designated manager, not just "member-managed" by default.
• Does it require logging capital contributions? Every dollar you put in, with a date — because it's a reportable movement on Form 5472.
• Does it define how distributions are documented? How and when you withdraw money, on a cash basis and with its trail.
• Does it assert asset separation? Company and owner assets kept distinct, with an indemnification clause for the manager.
• Does it explain how it dissolves? Closing steps, without forgetting to deregister the registered agent in New Mexico.
• Does it set the governing law? New Mexico governing law and a dispute forum — the first thing the bank looks at.

The Operating Agreement isn't a form you fill in to have "the paper": it's the written proof of how your company is organized, and it's what third parties read when they decide whether to trust it. A free template gives you something to show; a complete OA gives you something that holds when they ask. If you want to understand the manager's role in a single-member LLC, we go into it in what your LLC's manager does. And if your LLC isn't single-owner, the OA goes from advisable to essential: we cover the difference in single-member vs multi-member LLC.