Freedom of contract: how much of your LLC's rulebook is written in pencil

The corporation comes with a rulebook you mostly cannot change. The LLC’s founding idea was the opposite: a liability shield wrapped around a contract, where the owners write their own rules and the statute only fills the silences.

That idea is real, but it arrived unevenly. Every state’s LLC act is a pre-written agreement, and the states differ on how much of it is written in pencil and how much in ink. Pencil means your operating agreement can erase the state’s rule and write your own. Ink means the rule stands no matter what you sign. Knowing your state’s pencil-to-ink ratio tells you what the document you signed is actually worth, and this page is the map.

The three families

State LLC acts sort into three rough families, and the family predicts your editing rights better than any single rule.

Delaware and its imitators wrote contractarian acts: nearly everything in pencil, on the explicit theory that sophisticated adults should get the deal they wrote. A large and growing bloc of states adopted the uniform acts instead, which keep the core owner protections in ink. And a third group, New York the loudest example, sits in between with homegrown statutes that give with one hand and carve back with the other.

Delaware: everything in pencil except one line

Delaware’s statute says it in a single sentence, section 18-1101(c): the duties that members and managers owe, fiduciary duties included, may be expanded or restricted or eliminated by the operating agreement. Eliminated. The duty of loyalty, the duty of care, the whole apparatus that normally stops the person running the company from serving themselves first: erasable, on purpose, as state policy.

One nuance keeps catching people. The pencil only works if you use it. Delaware courts hold that the full traditional duties apply by default until the agreement erases them, so a silent agreement leaves everything intact. The freedom is in the drafting, and an agreement that never mentions duties bought none of it.

Why would anyone erase loyalty? Because real deals need it. A private equity firm managing five funds cannot promise undivided loyalty to each. A manager running two ventures needs permission to run both. Delaware’s answer is to let the parties define exactly what is owed, down to authorizing a controller to act purely in its own interest, and then to enforce the words. In 2025 its courts did precisely that, enforcing a waiver against a minority holder who argued the outcome was unfair, with the supreme court affirming: the agreement said what it said.

The one line in ink

Delaware’s statute keeps a single rule beyond the pencil’s reach: no agreement may eliminate the implied covenant of good faith and fair dealing.

In plain terms, the implied covenant says you cannot use a gap in the contract to destroy the deal the contract obviously was. If the agreement gives the manager discretion over some mechanism, the manager cannot wield that discretion in bad faith to strip the other side of the very bargain they paid for.

Now the honest caveat, because this floor gets oversold as a safety net. Delaware courts apply the covenant sparingly and say so. It fills gaps; it never overrides words on the page, and it cannot resurrect a duty the agreement validly erased. If the document permits the conduct, the covenant is silent. It is a floor in the sense that a basement has a floor. Do not plan to land on it.

The uniform act states: the core in ink

The states that adopted the revised uniform LLC act made the opposite bet: most owners are not sophisticated funds with counsel, and some protections should survive any drafting.

Under that model, the duties of loyalty and care can be shaped but never fully erased. The agreement can carve out specific activities, this manager may run that competing business, this transaction is pre-approved, so long as the carve-out is not manifestly unreasonable, a backstop a judge holds. California’s version goes further still: even a written agreement cannot entirely eliminate loyalty or care, an oral agreement cannot modify the statutory protections at all, and changes require the members’ informed consent, meaning a signature on page 40 is not enough by itself.

Neither family is simply better. Delaware’s pencil serves people who draft carefully and punishes people who sign carelessly. The uniform states protect the careless signer and frustrate the careful drafter. The point is to know which game your state is playing.

New York: the middle case

New York shows the in-between family. Its statute lets an agreement eliminate a manager’s personal liability for breach of duty, which sounds like Delaware, then adds ink: the shield never covers bad faith acts or any act from which the manager gained a financial profit they were not entitled to. That proviso swallows much of the grant, since profiting improperly is what most duty lawsuits are about. New York also requires operating agreements to be written, full stop.

Handshakes count in some states

Delaware’s act recognizes operating agreements that are written, oral, or implied from conduct, meaning the way you and your partner actually ran things for six years can be your agreement. California sharply limits what an oral agreement can change. New York demands writing.

Wherever you are, the practical rule is the same and this site will keep repeating it: an unwritten agreement means the state’s default rulebook plus a fight about everyone’s memory. The defaults are the subject of the next topic on this spine, and the drafting that replaces them is a spine of its own. Write it down.

Freedom cuts both ways

The section the industry skips. Delaware’s freedom is always described from the drafter’s chair: flexibility, customization, sophistication. Sit in the other chair.

If you are the minority investor, the passive member, the person wiring money into someone else’s deal, then maximum freedom of contract means the document can lawfully remove every protection you assumed came standard, and the court will enforce it against you precisely because you signed it. In an ink state, the statute guards some of your back regardless. In Delaware, the document is the entire universe of your rights, and unfairness is not a cause of action.

So the family test runs through your seat at the table. Control the drafting, and pencil states are your friend. Sign what others drafted, and the pencil is pointed at you, which makes reading the agreement, or paying someone to, the cheapest protection in this entire field.