Should You Update Your Operating Agreement in the New Year?

By Darla A. Krzoska, Business & Employment Law

The start of a new year is often a time when business owners review goals, financials, and plans for growth. It’s also a smart time to revisit one of the most important governing documents a limited liability company has: the operating agreement. For many Wisconsin small businesses, especially LLCs, the operating agreement was created when the company first formed and hasn’t been updated since. But as a business grows, changes direction, or adds new people, the original document may no longer reflect how the business actually operates. For other companies, they may have added owners or changed owners and need to update their governing documents to an agreement that all of the owners now approve and sign. 

Updating an operating agreement doesn’t have to be complicated, but knowing when and why it should be done can prevent confusion and disputes later.

What an Operating Agreement Does

An operating agreement is the internal document that outlines how an LLC is owned, managed, and run. It can address:

• Ownership percentages
• Voting rights
• Profit distributions
• Member responsibilities
• Procedures for adding or removing members
• Decision-making rules
• Buyout terms
• Death of a member
• How the business handles disputes

Even single-member LLCs benefit from a clear agreement because it documents financial structure, protects liability status, and shows how business decisions are made.

Why the New Year Is a Good Time to Review It

Business owners often use the beginning of the year to look back on what changed over the last twelve months. Just like budgets and employee policies, an operating agreement should be reviewed as part of this process. A short annual review helps ensure the document still matches the company’s structure, priorities, and long-term plans.  It is also a good time to review the buyout provisions, including purchase price, in the event of the death or exit of a member from the business, since the members will now have the year end financials to help understand the value of the business and what that may mean in terms of buyout provisions. 

It’s also a practical moment because changes in tax strategy, staffing, ownership, or business direction often occur at year-end or early in the new year.

Reasons an Operating Agreement Might Need Updating

There are several situations where revisiting the operating agreement becomes especially important.

1. Changes in Ownership Structure

If a new member joined the business, someone exited, or ownership percentages shifted, the agreement should reflect those changes. Failing to update ownership details can create complications during profit distributions, voting decisions, or future sales of the company.

2. Business Growth or Expansion

A company that has expanded its services, added locations, or increased its workforce may need more detailed management provisions. What made sense for a two-person startup may not work for a growing team.

3. Updated Management Roles and Responsibilities

As businesses evolve, so do the roles of the people working in them. An operating agreement that outlines responsibilities too generally — or doesn’t reflect current reality — can cause confusion within the leadership team.

4. Changes in Financial Arrangements

New investments, loans, or profit distribution methods should be documented. If the business is bringing in outside capital or changing how money flows through the company, the agreement should be updated to match.

5. Anticipation of Major Future Events

Businesses planning for retirement transitions, succession strategies, or potential buyouts should include these procedures in the agreement. Clarity now prevents disagreements later.

6. Legal or Regulatory Changes

While Wisconsin’s LLC laws don’t change frequently, when they do, it’s important to ensure internal documents remain compliant. A review at the beginning of the year makes it easier to spot outdated provisions.

What Can Happen If the Operating Agreement Is Outdated

When an operating agreement no longer reflects the business as it is today, problems can arise during key moments, such as:

• Disagreements between members (or their Estate/heirs)
• Ownership transfers
• Profit distributions
• Decision-making on major issues
• Business valuation questions

Having outdated terms can also make resolving disputes more difficult or lead to outcomes that no longer match what members intended.

How Often Should You Review Your Operating Agreement?

Most businesses find it helpful to review their operating agreement:

• Once a year during financial planning
• Whenever ownership changes
• Before taking on major debt or investment
• When expanding or changing business models
• Before succession planning begins

A routine annual check-in is usually enough to ensure the document stays relevant.

The Value of Keeping Your Agreement Up to Date

An updated operating agreement helps keep the business running smoothly. It provides clarity for owners, managers, and future members. It can reduce conflict, simplify transitions, and ensure everyone understands their roles and rights as the business changes.

Reviewing the agreement at the start of the year sets a strong foundation for the months ahead and helps protect the business from misunderstandings or structural problems down the road.

Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. For personalized guidance, please consult an attorney at Bosshard Parke.