Managing an LLC: Compliance, Maintenance & Operating Agreement Essentials

Key Takeaways

Most LLCs lose good standing due to missed reports, unpaid taxes, or no registered agent.

The operating agreement governs authority, profits, voting, exits, disputes, and survival after major life events.

Death, divorce, bankruptcy, or departure can trigger buyouts, loss of control, or forced sales.

Regular financial tracking, compliance filings, and annual reviews prevent costly legal problems.

The most common way LLCs lose their legal status is through administrative dissolution. It is a state-ordered revocation triggered by missed annual reports, unpaid franchise taxes, or failure to maintain a registered agent.

Once dissolved, the LLC loses all legal standing. It cannot:

• Sue in court
• Defend against claims unrelated to winding up assets

The second most costly mistake is operating with a proper, customized operating agreement or having one that is never executed. This is where effective LLC management comes in. It involves interconnected obligations that reinforce each other.

Here, we will dive into managing your LLC with corrective actions.

What Does “LLC Compliance” Actually Mean (And What is Good Standing)?

LLC compliance means fulfilling all legal, regulatory, and administrative requirements necessary to maintain a LLC’s legal status and liability protection. Compliance consists of both External (government-mandated) and Internal (business-mandated) tasks.

External Requirements (The “Must Haves”)

1. Annual/Biennial Reports

Most states need a yearly “check-in” form to confirm your business address, members, and registered agent.

2. Franchise Taxes

Some states (like Delaware or California) charge a flat fee or tax just for the privilege of doing business there, regardless of whether you made a profit.

3. Registered Agent

You must always have a person or service designated to receive legal documents. If your agent resigns and you don’t replace them, you are “out of compliance.”

4. Licenses/Permits

Acquiring and keeping current all necessary professional and business licenses to legally operate in your industry and location.

5. Updated Internal Records

Document major business activities and maintain records like operating agreements, contracts, and financial statements.

Internal Requirements

1. Operating Agreement

The law does not always require it, but having one shows that your LLC is a serious, separate entity.

2. Meeting Minutes

LLCs are not usually forced to hold formal meetings like corporations, but documenting major decisions (like taking out a loan) helps protect your liability shield in case you are ever sued.

What is “Good Standing”?

It is a formal declaration by a state authority (Secretary of State’s office) that an LLC is current with all its statutory requirements and is legally authorized to conduct business in that state. You might need a formal Certificate of Good Standing (also called a Certificate of Existence or Certificate of Status) when:

• Applying for a business loan or line of credit
• Opening a business bank account
• Expanding your business into other states (foreign qualification)
• Entering into significant contracts or partnerships
• Selling the business or attracting investors

Do You Need an Operating Agreement for an LLC?

You can form an LLC without filing an Operating Agreement with the state. However, running the LLC without one is where problems start. The Operating Agreement is the LLC’s internal “rulebook”: It defines:

• Who has authority
• How decisions are made
• How money is split
• What happens when things go wrong (deadlocks, exits, death, disputes)

It is often functionally required in real life: banks, lenders, and investors commonly ask for it to verify ownership and signing authority.

What Does an Operating Agreement Cover?

A strong Operating Agreement typically addresses four big areas:

1. Governance + Authority (Who Can Do What)

• Whether the LLC is member-managed or manager-managed
• Who can bind the company (sign contracts, open accounts, borrow money)
• Voting structure: per-capita vs ownership-weighted
• Vote thresholds: majority vs supermajority vs unanimous
• Reserved matters: decisions that always require member approval (e.g., major debt, selling key assets, admitting new members)

2. Economics (Money In, Money Out)

• Initial capital contributions (cash, property, services, IP) and how ownership is recorded (percentages or units)
• Rules for additional capital calls (optional vs mandatory) and consequences if someone doesn’t contribute (loan, dilution, penalties)
• Profit/loss allocations vs cash distributions (not the same thing)
• “Phantom income” protection via tax distribution provisions (distributing enough cash to cover expected tax on allocated profits)

3. Ownership Changes + Exits (How People Enter/Leave)

• Transfer restrictions so interests can’t be sold to outsiders freely
• Right of First Refusal (ROFR) and approval requirements for transfers
• Buy-sell provisions for triggers like death, disability, divorce, resignation, bankruptcy, misconduct
• Valuation method (formula, appraisal, periodic agreed value) and payment terms lump sum vs installments)

4. Disputes + Continuity (How the LLC Survives Conflict)

• Dispute process: internal meeting →mediation →arbitration/litigation
• Deadlock solutions (especially for 50/50 LLCs): mediation stages, tie-breakers, or buyout mechanisms
• Succession/continuity: what happens if a member dies or becomes incapacitated (heirs get voting rights or economic rights only, or mandatory buyout)
• Amendment rules and dissolution procedures

Which States Require an Operating Agreement?

Most states treat Operating Agreements as optional (but strongly recommended). A key subset explicitly requires an Operating Agreement to exist, though the allowed format varies:

• New York: Written operating agreement required, and it must be adopted within 90 days after filing the Articles of Organization.
• California: Operating Agreement is treated as required, and it may be written, oral, or implied under the RULLCA framework.
• Maine: An LLC agreement must exist (it can be written, oral, or implied).
• Missouri: Members must adopt an Operating Agreement (can be written or oral).
• Delaware: An LLC agreement is required in concept, and can be written. Oral or implied (Delaware’s approach strongly emphasizes freedom of contract, but key provisions may still fail without writing under general contract rules).

Should Your LLC Be Member-Managed or Manager-Managed?

LLCs can be set up in two main ways:

1. Member-Managed

In a member-managed LLC, the owners run the business day to day.

2. Manager-Managed

In a manager-managed LLC, the members appoint one or more managers who may or may not be owners to handle operations.

Member-managed works well for small, hands-on teams, while manager-managed fits businesses with passive investors or more complex operations. You can switch structures later by updating your Operating Agreement and filing the required state paperwork.

How Should Voting Work in an LLC (And What Decisions Need a Supermajority)?

The voting structure of an LLC is highly flexible and can be customized in the operating agreement. The two primary methods are:

NOTE: Ownership-weighted voting is generally better in most business situations. It ties decision-making power to the company's financial interests. Per capita might be preferable for a small LLC with all members active and contributing equally, like in a 50/50 partnership. Ensure clear deadlock-resolution procedures are in place to avoid standoffs.

How Do LLCs Handle Deadlocks (Especially 50/50 Ownership)?

A deadlock in a 50/50 LLC occurs when both members can’t agree on key decisions, including:

• The company’s direction
• Major financial moves
• Leadership changes

The business can get stuck as there is no majority to break the tie. The Operating Agreement provides a set of tools to break the deadlock without needing to go to court.

Deadlock Resolution Mechanisms

Many LLCs create a step-by-step process for resolving deadlocks to avoid costly legal battles.

Mediation

A neutral third party helps the members work through their issues. It is confidential and non-binding, which keeps things low-cost and can help preserve relationships before things get too serious.

Arbitration

Arbitration steps in if mediation doesn’t work. A third-party arbitrator makes a legally binding decision. The Operating Agreement will usually outline which rules apply (e.g., AAA or JAMS) and how the arbitrator is selected.

Internal and External Tie-Breakers

Sometimes the Operating Agreement will set up a tie-breaker system to ensure things keep moving forward:

Tie-Breaker Manager

A neutral third party is given the power to cast the deciding vote in a deadlock.

Rotating Casting Vote

The ability to break the tie alternates between members. For example, Member A breaks the tie in the first issue, and Member B does so the next time.

Provisional Director

A non-member or non-creditor is appointed to cast a vote and break any board-level stalemate.

Buy-Sell Triggers For Deadlock Resolution

If a deadlock persists, the Operating Agreement can include “divorce” mechanisms to force one member to exit:

• Russian Roulette (Shotgun Chase): One member sets a price to buy the other’s share; the other must buy or sell at that price.
• Texas Shootout (Sealed Bid): Both submit sealed bids; the highest bid wins, and the buyer purchases the other member’s share.
• Dutch Auction (Mexican Shootout): Members submit bids with the lowest price they’d accept; the highest bid must buy the other out.
• Appraisal Model: An Independent appraiser sets the fair market value for the buyout.

These clauses encourage members to compromise before using them.

How Do You Track LLC Ownership, Capital Contributions, and Dilution?

LLCs keep track of ownership, capital contributions, and dilution mainly through the:

• Operating Agreement
• Capital Account Ledgers
• Membership Interest Schedules

These documents record each member’s contributions (cash, property, or services), distributions, and share of income or losses. Units are preferred over percentages for easier management of dilution when issuing new interests. Units work like shares of stock, and they avoid the need to constantly recalculate everyone’s stake every time new interests are issued.

Tracking Methods

It is important to maintain detailed records in the Operating Agreement and capital ledgers. This includes documenting initial and future contributions, ownership stakes (either as percentages or units), and any changes over time. Capital accounts should be updated annually for tax purposes (e.g., tracking each member’s basis) and monitored in real time using tools like spreadsheets. Dilution occurs when new units are issued or additional capital is called, and it is adjusted based on total contributions or units outstanding.

How do LLC Profits, Losses, and Taxes Work (And What is “Phantom Income”)?

When it comes to LLCs, it is important to understand that profit distribution and tax allocation are not the same thing.

• Distributions are the actual cash payouts you receive from the LLC.
• Allocations refer to how the profits and losses are assigned to members for tax purposes, even if no cash changes hands.

In many LLCs, you might be allocated income for tax purposes, even if you didn’t actually receive any cash in distributions. This is what leads to “phantom income”. The income you are taxed on, but didn’t receive in cash.

A Practical Fix: Many LLCs include a “tax distribution” provision in their Operating Agreement. This ensures the LLC distributes enough cash to cover members’ expected taxes based on their allocated share of profits. It doesn’t eliminate taxes. It helps reduce those surprise tax bills and avoids resentment when members have to pay taxes on income they never received.

K-1 Basics

For multi-member LLCs taxed as partnerships, members typically receive a Schedule K-1. It reports each member’s share of income, deductions, and credits for tax purposes. Your Operating Agreement should clearly address several key details related to taxes:

• Who will handle the tax preparation
• The timelines for delivering tax documents, like the K-1.
• Whether tax distributions are required to help cover members’ tax liabilities.
• How special allocations (if any) will be handled

Tax laws are complex and can vary; it is always a good idea to consult with a tax professional to ensure you are fully compliant and avoid any surprises.

What Happens if an LLC Member Leaves, Dies, Divorces, or Goes Bankrupt?

The LLC’s operating agreement dictates the outcome if an LLC member leaves, dies, divorces, or goes bankrupt. State law default rules apply in the absence of an operating agreement.

Death

In multi-member LLCs, heirs usually receive only economic rights, not management authority. In single-member LLCs, the business may dissolve without a succession plan.

Voluntary Departure

The member loses management rights but may retain economic rights unless a buyout applies. Compensation depends on the operating agreement.

Divorce

A spouse may receive the value of the LLC interest, but does not gain management rights. Most agreements require a buyout to avoid shared ownership.

Bankruptcy

A trustee can seize and sell a member’s economic interest, but cannot manage the LLC. Many agreements trigger forced buyouts to protect the business.

What is the LLC Maintenance Checklist (Monthly, Quarterly, Annual)?

Monthly LLC checklist

Monthly tasks focus on day-to-day operations and financial tracking to prevent small issues from becoming major problems.

1. Track Income and Expenses

Meticulously record all business transactions.

2. Maintain Invoices and Payments

Compare bank statements with internal financial records to ensure accuracy.

3. File Estimated Taxes

Estimated federal and state taxes may need to be paid monthly or quarterly, depending on tax status.

4. Review Payroll and Employment Taxes

Ensure all payroll tax obligations are met if you have employees.

5. Update Financial Statements

Keep internal profit and loss statements and balance sheets current.

6. Monitor Cash Flow

Review the business’s cash position to manage liquidity effectively.

7. Perform a Quick Compliance Check

Briefly review business operations to ensure ongoing compliance with any applicable regulations.

Quarterly LLC Checklist

1. File Quarterly Tax Returns

This is a key requirement for many LLCs, including quarterly estimated tax payments to the IRS and relevant state departments.

2. File Quarterly Payroll Reports

You must file quarterly payroll tax reports and pay associated taxes if you have employees.

3. Conduct a Comprehensive Financial Review

Meet with an accountant or review financial performance to assess business health and adjust future planning.

4. Review Budgets

Compare actual spending and income against the established budget and make adjustments as needed.

5. Assess Compliance and Regulatory Changes

Briefly research and adapt to any new federal, state, or local laws that might affect your business.

Annual LLC Checklist

1. File Annual Reports (or Franchise Tax Reports)

Most states require LLCs to file an annual report or pay a franchise tax to keep their information current and remain in good standing. Deadlines and fees vary by state. Check your specific state’s requirements on its Department of State website.

2. File Annual Tax Returns

File the LLC’s federal and state income tax returns by the applicable deadlines.

3. Renew Business Licenses and Permits

Many local and professional licenses expire annually and require renewal to operate legally.

4. Review and Update the Operating Agreement

Revisit your LLC Operating Agreement to ensure it reflects current business operations, ownership percentages, or management structure changes.

5. Hold Annual Meetings (If Applicable)

Annual meetings are not legally required for all LLCs, especially single-member ones. These meetings help formalize decisions and reinforce the separation between personal and business liability.

6. Conduct Year-End Financial Review

Perform a thorough financial audit of the year’s performance to plan for the next year.

7. Verify Registered Agent Information

Make sure your registered agent’s details are current with the state.

8. Maintain Separate Finances

Reaffirm the practice of keeping all business finances separate from personal ones to protect your personal liability status.

Do LLCs Still Need To File BOI Reports Under the Corporate Transparency Act?

No, LLCs formed in the U.S. are generally no longer required to file Beneficial Ownership Information (BOI) reports with FinCEN as of a March 2025 interim final rule. It effectively exempts all U.S.-based entities, including LLCs, from the Corporate Transparency Act (CTA) reporting requirements.

Need Help Managing Your LLC?

Effective management of an LLC is not only about formation. It is also about:

• Ongoing compliance
• Deadlines
• Documentation

This is where Swyft Filings can help. We support LLC owners with the administrative side of management, including:

• Annual reports filing
• Registered agent service
• Sending compliance reminders
• Assisting with EINs, amendments, and reinstatements

Explore LLC compliance and maintenance support with Swyft Filings.

Frequently Asked Questions (FAQs)

1. How should my LLC be managed?

Your LLC should be managed:

• Either by its members (owners) in a Member-Managed structure
• Or by designated managers (who can be members or outsiders) in a Manager-Managed structure

2. How to properly manage an LLC?

It involves:

• Strict financial separation (separate bank accounts)
• Maintaining compliance (annual reports, taxes, BOI filings)
• Creating a strong Operating Agreement
• Holding regular meetings
• Following formalities like getting an EIN and licenses to preserve liability protection

3. What is the best management structure for an LLC?

The best management structure for an LLC depends on your business size and member involvement. There are two main options you can consider:

• Member-managed ( all owners run daily operations, ideal for small businesses)
• Manager-managed (designated managers handle daily tasks, better for larger ventures or passive investors)

4. Who has control in an LLC?

Control in an LLC rests with its members (owners) or designated managers, depending on the management structure chosen in the operating agreement.

5. What expenses can you write off for your LLC?

An LLC can write off ordinary and necessary business expenses, which are costs that are common in your industry and helpful for your business operations.