An operating agreement or shareholder agreement is the private rulebook for a closely held business. It decides who makes decisions, how money comes in and goes out, what happens when owners disagree, and how an owner leaves. Holmes Law prepares and reviews these agreements as a Washington operating agreement attorney for LLCs, corporations, and their owners, with particular attention to the default rules that Washington law imposes whenever the owners have not written their own.
Many Washington businesses operate for years on a downloaded template or no agreement at all. That usually works until a partner dies, divorces, stops working, or wants out, and then the statute’s default rules decide the outcome, often in a way none of the owners intended. Michael Holmes is admitted in Washington and works with business owners statewide by video and phone. This page explains the main Washington rules in general terms to help you prepare for a consultation; it is not legal advice about your company.
What Washington Law Supplies When the Agreement Is Silent
For an LLC, the governing statute is the Washington Limited Liability Company Act, chapter 25.15 RCW, which was rewritten effective January 1, 2016. The Act calls the operating agreement the “limited liability company agreement” and gives it priority over most of the statute’s default rules under RCW 25.15.018. For corporations, the Washington Business Corporation Act, Title 23B RCW, supplies the default rules, and the owners’ arrangement lives in the articles, bylaws, and any shareholder agreement.
Some of the Washington LLC default rules that owners most often want to change:
- Management. An LLC is member-managed unless the certificate of formation or LLC agreement provides for managers (RCW 25.15.154). In a member-managed LLC, each member may act for the company in the ordinary course.
- Voting. Ordinary decisions require the approval of a majority of the members (RCW 25.15.121). The Act does not scale default voting by ownership percentage, so a member holding a small percentage can have an equal vote unless the agreement says otherwise.
- Distributions. Default distributions are shared in proportion to the agreed value of each member’s contributions (RCW 25.15.206), which may not match what the owners intended if one contributed services rather than cash.
- Withdrawal. A member may withdraw at any time, and under RCW 25.15.131 the withdrawn member has no statutory right to be paid for the interest. The member keeps only the economic rights of a transferee.
- Death. A deceased member’s personal representative may exercise the rights of a transferee, and certain member rights for purposes of settling the estate, but does not automatically step into management.
Corporate defaults are more formal: shareholders elect directors, directors manage, and shareholders generally have no right to be bought out when they leave the business. The absence of an exit right is the core problem for minority shareholders in closely held Washington corporations, and a shareholder agreement is where it gets solved.
Fiduciary Duties and How Far an Agreement Can Modify Them
Washington gives LLC owners more room than many states to shape fiduciary duties by contract. Under RCW 25.15.038, the members of a member-managed LLC, and the managers of a manager-managed LLC, owe duties of loyalty and care. The statutory duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. The duty of loyalty includes accounting for company property and opportunities, not dealing with the company as an adverse party, and not competing with it.
RCW 25.15.038(6) allows the LLC agreement to modify, expand, restrict, or even eliminate those duties, with two limits the agreement cannot cross: it cannot eliminate or restrict the duty to avoid intentional misconduct and knowing violations of law, and it cannot eliminate the implied contractual covenant of good faith and fair dealing. Liability limits and indemnification provisions are subject to parallel limits. RCW 25.15.018 also bars an agreement from unreasonably restricting access to records or the right to bring certain actions, or restricting the right to seek judicial dissolution.
That flexibility is useful, for example when an investor-member owns other businesses in the same industry and needs a clear carve-out from the duty not to compete. It is also a risk: a minority member who signs an agreement that eliminates loyalty duties may have very few remedies later. A Washington operating agreement attorney should explain exactly what each owner is giving up.
For corporations, directors’ duties are set by RCW 23B.08.300, and RCW 23B.08.320 allows the articles to limit directors’ personal liability for money damages, subject to exceptions for acts such as intentional misconduct, knowing violations of law, unlawful distributions, and transactions from which the director personally receives a benefit to which the director is not legally entitled.
Management Structure and Decision-Making
The agreement should match the way the business is actually run. Common approaches include:
- Member-managed with defined major decisions. Owners share day-to-day authority, but a list of major decisions (borrowing above a limit, selling significant assets, admitting new members, changing the business) requires a supermajority or unanimous vote.
- Manager-managed. One or more managers run the business and members vote only on matters the agreement reserves. This fits LLCs with passive investors, family LLCs, and real estate ventures.
- Board-style LLC. Larger LLCs sometimes adopt a board of managers and officers, borrowing the corporate model while keeping LLC tax treatment.
- Shareholder-controlled corporation. Under RCW 23B.07.320, all shareholders of a corporation whose shares are not publicly traded may sign an agreement that restricts or even eliminates the board, allocates authority among shareholders, sets distribution policies, and resolves deadlocks. The existence of the agreement must be noted on share certificates or information statements, and the agreement stops being effective if the shares become publicly traded.
Voting thresholds should be written in percentages of units or shares, not heads, unless the owners truly want per capita voting.
Capital Contributions and Capital Calls
Disputes about money are the most common source of owner conflict. A good agreement records each owner’s initial contribution and its agreed value, and it answers what happens when the business needs more money.
Key choices include whether additional capital calls are mandatory or voluntary; the consequences if an owner does not contribute, such as dilution, conversion of another owner’s advance into a priority loan, or a reduction in the defaulting owner’s percentage; whether owner loans are permitted and on what terms; and how services-only owners (sometimes called sweat equity) are treated for capital account purposes. For LLCs taxed as partnerships, the capital and allocation provisions need to track federal partnership tax rules, which is an area where the owners’ CPA should be involved.
Transfer Restrictions
Most closely held businesses want to control who can become an owner. Washington law lets them do so. Under the LLC Act, a transferee receives only economic rights, the right to receive distributions, unless admitted as a member under the agreement. For corporations, RCW 23B.06.270 authorizes reasonable restrictions on transfer of shares, provided they are noted conspicuously on the certificate or information statement to bind a person without knowledge.
Typical transfer provisions include:
- A general prohibition on transfer without consent.
- A right of first refusal allowing the company or the other owners to match a third-party offer.
- Permitted transfers to an owner’s revocable trust or family members for estate planning, often conditioned on the owner retaining control.
- Tag-along rights for minority owners and drag-along rights for majority owners in a sale of the whole company.
- Provisions addressing transfers to a former spouse, which are especially important in Washington as a community property state.
The mechanics of buying out an owner on death, disability, divorce, or departure usually belong in a buy-sell agreement or buy-sell article. See WA buy-sell agreements for how those provisions work.
Deadlock
Two-owner businesses with equal ownership face deadlock risk from the start. Washington’s statutes offer limited help. For LLCs, a member or manager may ask the superior court to dissolve the company under RCW 25.15.274 when it is not reasonably practicable to carry on the company’s activities in conformity with the certificate of formation and LLC agreement, or when other circumstances render dissolution equitable. For corporations, RCW 23B.14.300 permits a shareholder to seek judicial dissolution when the directors are deadlocked, the shareholders cannot break the deadlock, and irreparable injury is threatened; when the shareholders have failed for at least two consecutive annual meeting dates to elect directors; or when those in control have acted in a manner that is illegal, oppressive, or fraudulent.
Dissolution is a blunt remedy, and litigation is expensive. A well-drafted agreement offers better tools, such as:
- Escalation to mediation, then binding arbitration of defined operational disputes.
- A tie-breaking independent manager or director for specified issues.
- A buy-sell (“shotgun”) clause, where one owner names a price and the other must either buy or sell at that price.
- A put right or an agreed sale process after a deadlock persists for a defined period.
Dissociation, Withdrawal, and Dissolution
Because a withdrawing Washington LLC member has no statutory right to payment, owners often want the agreement to address departures directly. The agreement may prohibit voluntary withdrawal, treat withdrawal as a breach, or, more often, pair a departure with a buyout at a defined price and payment schedule. It should also identify events of dissociation, such as death, adjudicated incapacity, bankruptcy, expulsion for cause, or termination of employment, and state what follows from each.
The agreement should also address dissolution: what events cause it, who winds up the business, the order of distributions, and whether the business may continue after an owner’s death. Planning for continuation connects directly to the owners’ estate plans; see the Washington estate planning page.
Veil Piercing: Keeping the Liability Shield Intact
A properly formed and maintained LLC or corporation generally protects owners from personal liability for business debts. Washington courts may disregard the entity only in limited circumstances. The Washington Supreme Court’s test in Meisel v. M & N Modern Hydraulic Press Co., 97 Wn.2d 403 (1982), requires that the corporate form have been intentionally used to violate or evade a duty, and that disregarding it be necessary to prevent unjustified loss to the injured party. RCW 25.15.061 applies the same corporate standard to LLC members and states that an LLC’s failure to hold meetings is not a factor.
Washington courts apply the doctrine sparingly, and the burden is on the party seeking to disregard the entity. Undercapitalization alone, or the fact that a company has a single owner, generally does not justify piercing without the intentional misuse the Meisel test requires. Practical habits still matter: keep business and personal funds separate, capitalize the business reasonably for its risks, sign contracts in the company’s name and your official capacity, keep the Secretary of State annual report current, and document significant decisions. The operating agreement itself is evidence that the owners treat the company as a separate entity.
Community Property Considerations
Washington community property rules affect governance. An owner’s spouse or registered domestic partner may hold a community interest in the owner’s units or shares even if the spouse never signed anything. RCW 26.16.030 requires both spouses’ consent to sell, convey, or encumber business assets or goodwill when both participate in management. To make sure transfer restrictions and buyout terms bind spouses, Washington agreements commonly include a spousal consent signed by each owner’s spouse, and they state how the company will handle an interest awarded to a former spouse in a dissolution. Owners can also address characterization in a marital agreement.
Frequently Asked Questions
Is an operating agreement required in Washington?
The statute does not require a written LLC agreement to form an LLC, but operating without one means the Act’s default rules govern. Banks, investors, and buyers commonly ask for a signed agreement, and multi-member LLCs in particular should have one.
Can our LLC agreement waive fiduciary duties entirely?
Washington permits an LLC agreement to modify, restrict, or eliminate fiduciary duties, but it cannot eliminate the duty to avoid intentional misconduct and knowing violations of law, or the implied covenant of good faith and fair dealing.
Does a small Washington corporation need a shareholder agreement?
If there is more than one shareholder, a shareholder agreement is usually worth having. Without one, minority shareholders generally have no exit right, and there is no agreed method for resolving deadlock or buying out a deceased owner’s shares.
What can a court do if Washington LLC members are deadlocked?
A member or manager can petition for judicial dissolution under RCW 25.15.274 when it is not reasonably practicable to carry on the business in conformity with the certificate and LLC agreement or when dissolution is equitable. Agreement-based deadlock mechanisms are usually faster and cheaper.
Can we update an older operating agreement?
Yes. Amendments follow the procedure in the existing agreement, often requiring unanimous or supermajority consent. Agreements signed before the 2016 rewrite of the LLC Act are worth reviewing because statutory references and defaults changed.
Does my spouse need to sign our operating agreement?
A spouse is not a party to the business, but in Washington a signed spousal consent helps ensure the spouse’s community interest is bound by the transfer restrictions and buyout terms.
Speak With a Washington Operating Agreement Attorney
A carefully written agreement costs far less than a dispute decided by statutory defaults. Holmes Law drafts new LLC agreements and shareholder agreements and reviews existing ones against current Washington law. Learn more on the Washington business law page, read about WA entity formation, or contact Holmes Law to schedule a consultation.