An operating agreement or shareholder agreement is the private contract that tells co-owners how their company will actually run: who decides, who contributes, who gets paid, who can sell, and what happens when the owners stop agreeing. In North Carolina, every LLC and corporation already has a set of rules whether or not the owners sign anything, because the LLC Act and the Business Corporation Act supply default terms. A North Carolina operating agreement attorney drafts the agreement that replaces those defaults with rules that fit your business, and reviews existing agreements before a new investor, a dispute or a sale exposes their gaps.
Holmes Law is the practice of Michael Holmes, an attorney licensed in North Carolina and five other states, who works remotely with owners of closely held North Carolina companies. Clients include business partners forming a new company, families that hold real estate or an operating business together, and minority or majority owners who want to understand where they stand under an agreement signed years ago. This page is part of the North Carolina business law practice area and walks through the provisions that matter most.
Why the Statutory Defaults Rarely Fit
The North Carolina LLC Act, Chapter 57D, and the North Carolina Business Corporation Act, Chapter 55, are written to work for any business. That generality is exactly why they rarely fit a particular one. Consider a few LLC defaults:
- Under G.S. 57D-3-20, every member is a manager by virtue of being a member, and management decisions are made by majority vote. A passive investor who holds 10 percent is therefore a manager with authority unless the agreement says otherwise.
- Under G.S. 57D-3-03, certain actions require the consent of all members, including amending the operating agreement, admitting new members, disposing of substantially all of the company’s assets outside the ordinary course, dissolving, converting and merging. A single member can block each of them.
- Under G.S. 57D-4-03, interim distributions are made at such times and in such amounts as the company determines, in proportion to the members’ aggregate contributions. If one member contributed cash and another contributed labor that was never valued, the default split may bear no resemblance to the owners’ deal.
- Under G.S. 57D-5-05, an owner cannot withdraw and force the company to buy out his or her interest unless the operating agreement or the law requires it.
Corporations have their own defaults, such as board control of distributions and officer appointments and majority shareholder control of director elections. None of these rules is unreasonable in the abstract, but each will control your company if you have not agreed to something different. The purpose of a North Carolina operating agreement attorney is to identify which defaults you want to keep and which you need to override.
What an Operating Agreement Can and Cannot Change
North Carolina gives LLC members broad freedom of contract. G.S. 57D-2-30 provides that the operating agreement governs the company’s internal affairs and the rights and duties of the members, managers and other company officials among themselves. That freedom has limits. The operating agreement generally cannot:
- change the rules for filings with the Secretary of State or the rights of third parties who are not parties to the agreement;
- eliminate a member’s right to bring a derivative action or to seek judicial dissolution, unless the agreement provides an alternative remedy;
- reduce certain statutory protections for members and for the company’s liability shield;
- escape the implied contractual covenant of good faith and fair dealing; or
- be enforced to the extent a term was unconscionable when made.
Corporations have similar flexibility through G.S. 55-7-31, which lets shareholders of a non-public corporation enter an agreement that restricts or even eliminates the board of directors, governs voting, sets distributions and otherwise controls the management of the corporation. The agreement must be in writing and signed by all persons who are shareholders when it is made, either in the articles or bylaws or in a separate document made known to the corporation, and its existence should be noted conspicuously on share certificates. It stops being effective if the corporation becomes public.
Fiduciary Duties and How Far They Can Be Modified
Duties of managers
Under G.S. 57D-3-21, a manager must discharge his or her duties in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and, subject to the operating agreement, in a manner the manager believes to be in the company’s best interests. The Act makes managers’ conduct subject to the operating agreement, which gives owners room to tailor those standards. That flexibility is useful, for example to permit a manager to pursue other real estate ventures without offering them to the company first, but it has to be drafted precisely. A general statement that “no member owes any duty” is more likely to create litigation than prevent it, and the implied covenant of good faith and fair dealing remains no matter what the agreement says.
Duties between owners
North Carolina courts have generally held that LLC members, simply as members, do not owe fiduciary duties to one another, while managers owe duties to the company. The picture changes when one member controls the company: North Carolina courts have recognized that a controlling member or majority shareholder may owe duties to minority owners. In closely held corporations, the North Carolina Supreme Court’s decision in Meiselman v. Meiselman, 309 N.C. 279 (1983), recognized that a minority shareholder’s “reasonable expectations,” such as continued employment or a role in management, can support judicial relief when those expectations are frustrated. An agreement that spells out each owner’s role and compensation reduces the room for later arguments about what everyone expected.
Exculpation and indemnification
The operating agreement can limit a manager’s personal liability to the company and provide broader indemnification than the statutory minimum in G.S. 57D-3-31, and a corporation’s articles can limit directors’ personal liability for monetary damages subject to statutory exceptions. These provisions are valuable for owners who serve as managers, but minority owners should understand exactly what claims they are giving up.
Management Structure in a North Carolina Operating Agreement
The first drafting decision is who runs the company. Most North Carolina LLC agreements choose one of three models:
- Member-managed. All members participate, usually with voting by percentage interest. Appropriate for small groups of active owners.
- Manager-managed. One or more designated managers, who may or may not be members, run the business. Common where some owners are passive investors.
- Board-managed. A board of managers with officers, resembling a corporation. Useful for larger groups or companies with outside investors.
Whatever model you choose, the agreement should list “major decisions” that require a higher approval threshold, such as borrowing above a set amount, selling significant assets, hiring family members, admitting new owners, approving budgets or changing the business. It should also address officer titles and signing authority, because third parties dealing with the company will look for evidence that the person signing had authority.
Capital Contributions and Capital Calls
The agreement should record what each owner contributed at formation and what, if anything, each owner must contribute later. Under G.S. 57D-4-02, if a member contributed a promissory note or another obligation to provide money, property or services, the company can require payment of the value of the unperformed portion even if the member’s death or disability would otherwise excuse performance, so owners should be careful about signing open-ended commitments.
Well-drafted capital call provisions answer several questions in advance:
- Who can make a capital call, and for what purposes?
- Is there a cap on required contributions?
- What happens if an owner does not fund: dilution, a priority loan from the funding owners, loss of voting rights, or a forced sale?
- Can owners make loans to the company instead of contributions, and on what terms?
The agreement should also address distributions, including tax distributions for LLCs taxed as partnerships, since members owe tax on their share of profit whether or not cash is distributed. G.S. 57D-4-05 separately prohibits distributions that would leave the company unable to pay its debts as they come due or with liabilities exceeding assets, and managers who approve improper distributions can face personal liability.
Transfer Restrictions
North Carolina law already restricts transfers to some extent. Under G.S. 57D-5-02, a member can transfer an economic interest, but the transferee receives only the right to distributions and does not become a member or gain management rights without admission. Most owners want more control than that. Common provisions include:
- an outright prohibition on transfers without consent, with exceptions for transfers to trusts or family members for estate planning;
- a right of first refusal for the company or the other owners;
- tag-along rights that let minority owners join a sale by the majority;
- drag-along rights that let the majority require minority owners to join an approved sale.
For corporations, G.S. 55-6-27 allows restrictions on share transfers for reasonable purposes, including options and purchase obligations, but a restriction binds a holder who lacked knowledge of it only if it is noted conspicuously on the certificate or the required information statement. That is a formal step many small corporations miss. Transfer provisions often overlap with the purchase obligations covered on the NC buy-sell agreements page, and the two documents should be drafted together.
Deadlock
Two owners with equal interests are one disagreement away from paralysis. North Carolina’s default solution is litigation: under G.S. 57D-6-02 a member may seek judicial dissolution if it is not practicable to conduct the company’s business in conformity with the operating agreement and the Act, or if liquidation is necessary to protect the member’s rights or interests. Under G.S. 57D-6-03, the court will not order dissolution if the company or other members elect to buy the complaining member’s interest at fair value. For corporations, G.S. 55-14-30 permits dissolution for director or shareholder deadlock, waste of assets, or where liquidation is reasonably necessary to protect the complaining shareholder, and G.S. 55-14-31(d) lets the corporation avoid dissolution in certain cases by electing to purchase the complaining shareholder’s shares at fair value.
Court-supervised dissolution is expensive, slow and public, and complex disputes of this kind are frequently heard in the North Carolina Business Court. Agreements can provide better alternatives:
- escalation to mediation before any lawsuit;
- a tie-breaking independent manager or advisor for defined issues;
- a “shotgun” or buy-sell mechanism in which one owner names a price and the other chooses to buy or sell at that price;
- an agreed appraisal-based buyout.
Dissociation, Withdrawal and Dissolution
Under G.S. 57D-3-02, a person ceases to be a member on events that include death, bankruptcy, adjudication of incompetence and transfer of the entire economic interest. The person or estate then generally holds only an economic interest. That default can leave a surviving family in a difficult spot, holding a right to distributions with no vote and no way to cash out. An operating agreement should state what happens on each of those events and whether the company or the remaining members must, or may, buy the departing interest.
Dissolution provisions should identify what triggers dissolution under the agreement, who winds up the business, and how assets are distributed after creditors are paid under G.S. 57D-6-07. For real estate companies, the agreement may allow property to be distributed in kind rather than sold.
Protecting the Liability Shield
North Carolina courts will disregard an entity under the instrumentality rule when an owner so dominates it that it has no separate existence, uses that control to commit a fraud or wrong, and causes the plaintiff’s injury. The rule was stated in Glenn v. Wagner, 313 N.C. 450 (1985), and reaffirmed in Green v. Freeman, 367 N.C. 136 (2013). Courts look at factors including inadequate capitalization, noncompliance with corporate formalities, complete domination and excessive fragmentation of a single enterprise. Although an LLC is not required to hold annual meetings, an operating agreement that owners actually follow, with separate accounts, documented contributions and loans, and decisions recorded as the agreement requires, is strong evidence that the company is not a mere instrumentality. The NC entity formation page covers the practical steps at formation.
Frequently Asked Questions
Does North Carolina require an LLC to have a written operating agreement?
No. North Carolina does not require a written operating agreement, and the Act recognizes oral and implied agreements as well as written ones. Without a written agreement, however, the statutory defaults and whatever the owners can prove about their oral understanding will govern. That is a poor foundation for any company with more than one owner.
Can a single-member LLC benefit from an operating agreement?
Yes. It documents that the company is separate from its owner, names who manages the company if the owner dies or becomes incapacitated, and makes it easier to open accounts and prove authority. It can also work together with a North Carolina revocable trust so that management continues without a court proceeding.
Can we eliminate fiduciary duties in our North Carolina operating agreement?
The LLC Act makes managers’ duties subject to the operating agreement, but it cannot remove the implied covenant of good faith and fair dealing, and unconscionable terms are unenforceable. Duty modifications should be specific, such as permitting defined competing activities, rather than blanket waivers.
What happens if my business partner and I are deadlocked?
Without a deadlock provision, the main remedy is a judicial dissolution action under the LLC Act or the Business Corporation Act, and the other owners or the company may be able to avoid dissolution by buying out the complaining owner at fair value. A negotiated deadlock mechanism is almost always faster and cheaper.
I am a minority owner. What rights do I have without an agreement?
North Carolina law gives members information rights under G.S. 57D-3-04, the right to bring derivative claims, and the right to seek judicial dissolution in appropriate cases. Minority shareholders in closely held corporations may also rely on the reasonable-expectations analysis from Meiselman. These rights are real but costly to enforce, which is why negotiating protections into the agreement matters.
Can Holmes Law review an agreement we signed years ago?
Yes. Many agreements were drafted under the older LLC Act that Chapter 57D replaced, or were copied from forms that do not match how the business now operates. A review identifies gaps before they become disputes.
Speak With a North Carolina Operating Agreement Attorney
A clear operating agreement or shareholder agreement is the least expensive dispute resolution tool a business will ever buy. Whether you are forming a new company, bringing in an investor or trying to understand an agreement already in place, Holmes Law can help. Contact Holmes Law to schedule a remote consultation with Michael Holmes about your North Carolina company.