Why Your Operating Agreement Probably Needs an Update This Year (Even If Nothing Changed in Your Business)
Short Answer: Most Arkansas LLC operating agreements were drafted when the business was formed and never updated. Over time, changes in tax law, governance best practices, members’ personal situations, and the business itself create gaps between what the agreement says and what the owners actually need. Common gaps include outdated buyout provisions, missing dispute resolution procedures, tax election handling for new tax law, succession planning gaps, and protection provisions that no longer match the business’s risk profile. A 1 to 2 hour annual review with your business attorney catches these gaps before they cost you significantly more to fix during a crisis.
If your LLC operating agreement is sitting in a folder you have not looked at since you formed the business, you are not unusual. Most Arkansas LLC owners treat the operating agreement as a one-time formation document, never to be touched again unless something goes wrong. The problem is that things do go wrong, and when they do, an outdated operating agreement makes everything harder and more expensive.
We want to walk through why operating agreements need periodic updates, what the most common gaps look like, and how to think about an annual or biennial review.
What Operating Agreements Do
The operating agreement is the governing contract among LLC members. It determines who has authority to make decisions, how profits and losses are allocated, what happens if a member wants out or dies, how disputes get resolved, how the LLC is taxed, and many other foundational questions about the business.
Without a thorough operating agreement, Arkansas LLC default rules apply. The default rules are usually not what the members would have chosen if they had thought about it. Even more importantly, the default rules can produce results in a crisis that no rational member would have accepted at the start.
A good operating agreement anticipates problems and resolves them in advance. A bad operating agreement creates new problems when the inevitable challenges arise.
Why Updates Matter
The business changes over time. Operating agreements written for a startup do not fit a mature business. Operating agreements written for two founders do not work when there are five. Operating agreements written when members were all in their 30s need different provisions when members are approaching retirement.
Tax law changes. Federal and state tax provisions affecting LLC taxation evolve every few years. Provisions in your operating agreement that referenced the 2018 tax structure may not work optimally in the 2026 environment.
Best practices evolve. Governance practices, dispute resolution approaches, and member protections have changed significantly in the last decade. Agreements drafted 10 years ago may use approaches that are no longer considered effective.
Members’ personal situations change. Marriage, divorce, children, health issues, retirement plans, and personal financial situations all affect what members need from the operating agreement. Provisions that worked when all members were single change meaning when members have spouses with their own claims.
Common Gaps We See
Outdated buyout provisions. Many operating agreements specify a fixed multiple of revenue or earnings for member buyouts, set at the time of formation. The multiple appropriate for a $200,000 business is rarely the right multiple for a $2 million business. Buyout disputes that should be simple become contentious when the formula does not match reality.
Missing dispute resolution procedures. Old agreements may default to court litigation for member disputes. Modern best practice favors mandatory mediation followed by binding arbitration, which is faster and cheaper. Agreements without dispute procedures leave members in expensive litigation when conflicts arise.
Tax election handling gaps. The 2017 tax law created the partnership audit regime that affects how IRS audits of LLCs work. Operating agreements drafted before 2018 typically have no provisions for partnership representative selection or audit adjustment allocation. The default rules can produce outcomes that hurt some members significantly.
Succession planning gaps. What happens if a member dies or becomes incapacitated? Without clear provisions, the deceased member’s interest may pass to heirs who have no business experience, no relationship with other members, and conflicting goals. The remaining members may face an unworkable situation.
Protection provisions that no longer match risk. As the business grows, the legal and financial risks change. Indemnification provisions, insurance requirements, and liability limitations that were appropriate at formation may be inadequate for a larger business with more exposure.
Member spouse and family provisions. If a member’s spouse could claim an interest in the LLC during divorce, what happens? Modern operating agreements often include spousal consent provisions, marital property protections, and clear paths for handling family situations. Older agreements may not address these.
Capital call procedures. If the business needs additional capital, how is it raised? Without clear procedures, capital calls can create disputes among members about who must contribute and what happens to those who cannot.
Specific Triggers for Update
Several life and business events should trigger an operating agreement review.
Member changes. Adding, removing, or changing the equity percentage of any member is a clear trigger.
Business growth. Major revenue or scale changes (especially crossing $1 million, $5 million, $10 million thresholds) warrant review of provisions that may no longer fit.
Family changes affecting any member. Marriage, divorce, birth of children, serious illness, or planned retirement of any member all warrant review.
Significant tax law changes. The 2017 federal tax overhaul, partnership audit rule changes, and state tax modifications all warrant review of operating agreements drafted before these changes.
Industry or regulatory changes. New rules affecting your industry may require operating agreement updates to address compliance, ownership restrictions, or other industry-specific issues.
Conflicts among members. If members have had recent disagreements that the operating agreement did not resolve cleanly, the agreement probably needs strengthening in those areas.
What an Update Process Looks Like
A typical operating agreement review involves 1 to 2 hours of attorney time spread across a few sessions. The attorney reviews the existing agreement, asks questions about how the business has changed and what members need now, identifies gaps and recommended updates, and drafts amendments or a restated agreement as needed.
Cost varies significantly with the scope of changes. Minor amendments may cost $500 to $1,500. Significant restated agreements addressing multiple gaps may cost $2,500 to $7,500 or more for complex multi-member LLCs.
Compare to the cost of fighting a member dispute, defending an IRS audit, or unwinding an unworkable buyout. The update costs almost always compare favorably.
What Members Should Discuss Together
Before the legal work, members benefit from honest internal conversations. Are we still aligned on the business direction? Have any of us experienced personal changes that affect our situation? Are there decisions we have been deferring because the agreement does not address them? Are there member behaviors that have caused friction?
These conversations sometimes surface that members are no longer aligned, which is itself important to know. Better to discover misalignment in a planned conversation than during a crisis.
The Cost of Not Updating
The patterns we see when operating agreements are not updated: disputes that should be simple become expensive litigation; member departures that should be straightforward turn into multi-year arguments about valuation; IRS audits produce outcomes that hurt some members more than others because of default rules; family situations after a member’s death create chaos that drains the business; tax elections work against the members because no one made the proactive choices the law requires.
Each of these outcomes can run from $25,000 in attorney fees and lost time on the low end to several hundred thousand dollars or more on the high end. The annual review cost is a small fraction of those potential losses.
Frequently Asked Questions
How often should we update the operating agreement?
Annual review is ideal. Updates as needed based on the review. Substantial restatements every 3 to 5 years or after major changes.
Do all members need to agree to changes?
It depends on what the existing agreement says. Most agreements specify the vote needed for amendments. Sometimes it is majority, sometimes unanimous, sometimes a supermajority. The amendment provisions are themselves worth reviewing.
What if some members do not want to engage with the review?
If members are not engaged, the agreement update conversation is harder but often more necessary. Disengagement itself can be a warning sign about future conflicts.
Can we use online operating agreement templates for updates?
For the simplest changes, possibly. For meaningful updates, we strongly recommend attorney involvement. The provisions interact in complex ways and online templates rarely capture the nuances.
What to Do Next
If your LLC operating agreement has not been reviewed in several years, scheduling a review with experienced business counsel is a high-leverage use of attorney time. We help Northwest Arkansas business owners across Siloam Springs, Bentonville, Rogers, Fayetteville, and surrounding communities keep their operating agreements current.
Call us at 479-373-1800 or visit gregorylawfirmar.com to schedule a review consultation.
This article is for general information only and is not legal advice. Specific legal questions should be discussed with an attorney familiar with your situation. Gregory Law Firm, PLLC serves clients across Northwest Arkansas.