Save Hours on Operating Agreement Reviews with goHeather AI

I. All About Operating Agreements 

An Operating Agreement is the foundational governance document of a limited liability company (LLC). It serves as both a contract among the members and an internal constitution governing the management, economic rights, and operational mechanics of the entity. Although not always required by statute, an Operating Agreement is universally regarded as the principal source of authority for member rights and company governance, superseding default provisions of applicable LLC acts where permitted by law.

II. Purpose and Legal Effect

The primary purpose of an Operating Agreement is to:

1. Define ownership and capital structure, specifying each member’s capital contribution, percentage interest, and the mechanism for future capital calls.
   
   
2. Establish governance rights, delineating voting thresholds, decision-making procedures, and management authority (whether member-managed or manager-managed).
   
   
3. Allocate profits, losses, and distributions, providing the economic framework that determines how the LLC’s financial results are shared among its members.
   
   
4. Protect limited liability by reinforcing statutory protections and demonstrating the separateness of the entity from its members.
   
   
5. Provide exit and transfer mechanisms, addressing withdrawal, buyouts, restrictions on transfers, rights of first refusal, and succession in the event of death, disability, or bankruptcy.
   
   
6. Resolve disputes and specify governing law, setting forth internal dispute resolution procedures and the jurisdiction whose laws will govern the Agreement.
   
   

III. Structure and Typical Provisions

A well-drafted Operating Agreement generally includes the following sections:

1. Formation and Purpose
   - Identifies the LLC’s name, principal office, effective date, and business purpose.
   - References the formation filing (Certificate or Articles of Organization) with the relevant state authority.
   
   
2. Members and Capital Contributions
   - Lists members, their initial capital contributions, and ownership percentages.
   - Addresses future capital calls, dilution, and valuation methods for non-cash contributions.
   
   
3. Management and Voting
   - States whether the LLC is member-managed or manager-managed.
   - Sets forth powers of the managers, limitations on authority, and voting requirements for ordinary and major decisions (often unanimous or supermajority).
   - May include indemnification and exculpation provisions for managers and officers akin to those found in corporate bylaws.
   
   
4. Economic Provisions
   - Details allocations of profits and losses under Internal Revenue Code §704(b) principles.
   - Specifies timing and priority of distributions, including tax distributions and waterfall structures.
   - May provide for preferred returns, carried interest, or promote structures in private equity–style LLCs.
   
   
5. Transfer Restrictions and Exit Rights
   - Restricts assignments of membership interests to preserve control and tax status.
   - Includes rights of first refusal, drag-along or tag-along provisions, and buy-sell mechanisms.
   - Addresses dissolution events and liquidation priorities.
   
   
6. Books, Records, and Tax Matters
   - Mandates maintenance of accounting records and selection of fiscal year.
   - Designates a Tax Matters Partner or Partnership Representative under the Bipartisan Budget Act rules.
   - Specifies accounting methods and audit procedures.
   
   
7. Miscellaneous Provisions
   - Governing law, notice requirements, integration clause, amendment procedures, and execution authority.
   
   

IV. Relationship to Statutory Law

Operating Agreements derive their authority from state LLC statutes, for example, the Delaware Limited Liability Company Act, 6 Del. C. §18-101 et seq. These statutes provide broad contractual flexibility, permitting members to customize governance and economic arrangements, subject only to limited non-waivable provisions such as the implied covenant of good faith and fair dealing. Courts generally enforce the Operating Agreement according to its terms, reflecting the freedom-of-contract principle underpinning modern LLC law.

V. Comparison to Other Entity Documents

An Operating Agreement functions analogously to corporate bylaws and shareholders’ agreements for corporations, and to partnership agreements for partnerships. However, LLCs combine corporate limited liability with partnership-style tax treatment and operational flexibility, making the Operating Agreement a hybrid instrument that simultaneously governs both entity structure and contractual relations among members.

VI. Conclusion

An Operating Agreement is the central legal document governing an LLC’s existence, management, and economics. In sophisticated practice such as private equity, venture capital, or joint ventures, it is often a heavily negotiated instrument balancing control, capital protection, and exit rights among investors. Proper drafting ensures that the LLC operates predictably and that its members’ intentions are enforceable under applicable law.

How to Review an Operating Agreement Like a Top Transactional Lawyer

Here is how experienced transactional lawyers review an Operating Agreement with structure, precision, and commercial judgment. This framework applies whether you represent investors, founders, or management.

I. Start With the Context

Before reviewing the agreement line by line, begin by understanding the context.

1. Purpose of the Entity
   Determine whether the LLC is a portfolio company, joint venture, or holding vehicle. The purpose shapes which terms are most important, such as governance, economics, or exit rights.
   
   
2. Who Is Your Client
   Identify whether you represent a majority owner, minority investor, or manager. Each has different goals and risks.
   
   
3. Client’s Leverage
   Tailor your review to what is practical to negotiate based on bargaining power.
   
   
4. Governing Law
   Most LLCs are formed in Delaware, but other states vary. Delaware allows broad contractual flexibility, making precise drafting essential.
   
   

Understanding these factors helps you interpret the agreement strategically, not mechanically.

II. Read the Table of Contents Like a Map

• Start by skimming the table of contents or major section headings.
• Ask whether anything important is missing.
• If sections on capital calls, fiduciary duties, buy-sell rights, or tax matters are absent, that may signal incomplete drafting or unbalanced terms.

III. Review in Thematic Layers

Instead of reading from top to bottom, review the agreement in layers, focusing on one category of issues at a time.

1. Governance and Control

• Identify whether the company is member-managed or manager-managed.
• Check what actions require majority, supermajority, or unanimous consent.
• Review veto rights or protective provisions that could restrict your client’s ability to operate.
• Examine how fiduciary duties are defined, limited, or waived. In Delaware, most can be waived except for the implied covenant of good faith and fair dealing.

2. Economics

• Confirm the required capital contributions, timing, and any remedies for failure to fund.
• Review how profits, losses, and distributions are allocated.
• Ensure the written terms align with the deal model and intended economics.
• Check tax distribution provisions, preferred returns, and any carried interest structure.

3. Transfer Restrictions and Exit

• Review restrictions on transfers, pledges, or assignments of membership interests.
• Check for rights of first refusal, tag-along and drag-along provisions, and buy-sell mechanics.
• Confirm the dissolution and liquidation provisions reflect the intended business plan.

4. Minority and Investor Protections

• Examine lists of major decisions to ensure approval rights are not overly broad.
• Review reporting obligations, audit rights, and information access.
• Assess non-compete and non-solicit clauses for reasonableness and enforceability.

5. Dispute Resolution and Governing Law

• Confirm whether disputes are subject to court or arbitration.
• Verify that jurisdiction and venue provisions align with your client’s preferences
• Review any clauses on fee shifting, injunctive relief, or remedies.

6. Tax Provisions

• Ensure the LLC is intended to be treated as a partnership for federal tax purposes.
• Confirm that a Partnership Representative is appointed under current IRS rules.
• Review any special allocations, tax distributions, or deficit restoration obligations.

7. Boilerplate and Integration

• Review amendment provisions and approval thresholds.
• Check that governing law, notice, and integration clauses are consistent.
• Confirm that the execution clause allows electronic or counterpart signatures.

IV. Cross-Check Against the Deal Documents

Do not review the Operating Agreement in isolation. Compare it to related deal documents such as:

• The term sheet or letter of intent to ensure major deal terms are carried through.
• The subscription or purchase agreement to confirm capital amounts and closing mechanics.
• Any side letters granting additional rights.
• Financial or waterfall models to confirm that distributions and priorities align with the written language.

V. Comment and Mark Up Effectively

When providing feedback, focus on clarity and priority.

1. Spot only material issues that affect governance, economics, or liability.
   
   
2. Be specific: identify the issue, propose a fix, and explain why. Example: “Consider requiring only majority consent for debt under five million to avoid operational delays.”
   
   
3. Prioritize business-critical issues first, then secondary or drafting points.
   
   
4. Reference market standards or precedents to justify comments.
   
   
5. Keep your notes practical and concise.
   
   

VI. Summarize and Advise

After your review, prepare a short issues summary or cover memo.

• Group issues by category such as Major, Negotiable, or Technical.
• Explain the commercial impact of each issue, not just the legal point.
• Recommend strategies for negotiation or compromise.

The goal is to make the client’s position clear and actionable.

VII. Key Mindset: Precision and Leverage

Approach every Operating Agreement review with three layers of focus.

1. Legal accuracy — Are the provisions internally consistent and enforceable?
   
   
2. Economic alignment — Do the terms achieve the intended financial outcome?
   
   
3. Strategic leverage — Can the client’s position be improved through targeted changes?
   
   

By applying precision, commercial awareness, and strategic thinking, you can transform a complex LLC Operating Agreement into a clear, enforceable, and balanced document that protects your client’s interests.

Using AI to Review an Operating Agreement: How goHeather Can Help

Even for experienced lawyers, reviewing an Operating Agreement is time-consuming work. The document is long, repetitive, and filled with cross-references that demand careful attention. Missing a single definition or misreading a voting threshold can have real financial and control consequences. That’s why many professionals now use AI-assisted tools like goHeather contract review AI tool to handle the first pass.

goHeather is an AI contract review platform trained on real legal reasoning. It reads Operating Agreements the way a lawyer would, identifying control provisions, economic terms, and risk allocations, and summarizes the key findings in plain language.

When you upload an agreement, goHeather instantly highlights:

• unusual voting or consent requirements that could restrict decision-making
  
  
• missing or inconsistent capital contribution provisions
  
  
• one-sided distribution or liquidation language
  
  
• clauses that waive fiduciary duties or expand manager authority
  
  
• transfer and exit terms that could trap minority members
  
  

The platform doesn’t replace a lawyer’s judgment, but it makes the process dramatically faster. You can get an organized list of red-flag clauses, confirm that the economics align with the model, and understand which sections need closer human review.

For lawyers, goHeather becomes a way to triage dense documents before a full mark-up. For founders, investors, and business owners, it’s a practical way to understand what they are signing before engaging counsel. The AI’s checklist and explanations serve as a roadmap for the next layer of legal review.

By combining a professional’s expertise with goHeather’s intelligent first pass, you can review an Operating Agreement more efficiently, more accurately, and with a clearer picture of where the risks actually lie.

How AI Operating Agreement Review Works in Under 5 Minutes

Suppose you are forming or investing in a limited liability company and need to review the Operating Agreement. Traditionally, this process can take days, involving detailed checks of definitions, capital schedules, and voting rights. With goHeather, an AI trained by lawyers, a thorough first-pass review can be completed in minutes with clear feedback and suggested revisions.

goHeather: A Brief Step-by-Step Guide

Step 1: Upload Your Operating Agreement and Define Parameters

Upload your Operating Agreement in either PDF or Word format to the secure goHeather platform. You can also begin the review directly from Microsoft Word using the goHeather Add-In. During setup, specify the governing law jurisdiction and indicate your role, such as majority owner, minority investor, or manager, so the AI tailors its analysis to your position.

Step 2: AI Analysis and Risk Assessment

goHeather’s lawyer-trained AI uses Natural Language Processing and Machine Learning to convert complex legal text into structured data and assess it against key governance and economic standards.

• Core Review: The AI analyzes control rights, capital contributions, fiduciary duties, transfer restrictions, and dissolution mechanics, drawing on statutory norms and market practice.
• Playbook Application: Optional Playbooks allow users to apply their organization’s internal standards, such as approval thresholds or tax distribution policies, through a no-code interface. 
• Insight Generation: The AI flags potential issues by risk level and provides explanations in plain language, with recommendations for improvement.

Step 3: Make Informed Decisions and Finalize

After the analysis, you can refine and finalize the document using goHeather’s guidance.

• Redlining: goHeather proposes revisions to clarify terms or balance one-sided provisions.
• AI Chat Collaboration: You can ask direct questions about specific sections, request clause rewrites, or generate missing provisions in real time.
• Export: Export the reviewed agreement or a summary of findings to Word or PDF, complete with a checklist of issues to address in negotiation.

This process provides a quick and accurate first-pass review, allowing lawyers, founders, and investors to focus on strategy rather than manual document review.

What the AI Caught (Example)

High Risk: Unilateral Manager Control
Original: “The Manager shall have full and exclusive authority to act for the Company without the consent of any Member.”
AI Insight: Complete control without oversight creates governance risk.
Suggested Fix: “The Manager shall manage daily operations, subject to Member approval for major actions such as borrowing, mergers, or amendments to this Agreement.”

Medium Risk: Missing Tax Distribution Clause
Original: The document contains no provision for tax distributions.
AI Insight: Members could owe tax on allocated income without receiving funds.
Suggested Fix: “The Company shall make tax distributions sufficient to cover members’ estimated tax liabilities resulting from Company income.”