3 LLC Operating Agreement Traps That Can Cost New York Business Owners Millions

You and a business partner form an LLC in New York. You contribute capital, expertise, or maybe your entire brand. You sign an operating agreement that your partner's lawyer drafted. Five years later, the relationship falls apart. You get sued. You reach for the operating agreement expecting it to protect you. Instead, it works against you.

This is not a hypothetical. It is happening right now in courtrooms across Manhattan, Brooklyn, and Nassau County. Recent court decisions from 2025 and 2026 have exposed three specific traps in LLC operating agreements that are costing New York business owners millions of dollars in legal fees, lost buyouts, and trapped investments.

Here is what you need to know to protect yourself.

What Are the Most Dangerous Clauses in an LLC Operating Agreement?

The three most dangerous clauses in a New York LLC operating agreement are the indemnification and advancement provisions, the dissolution waiver, and the amendment clause. Each of these can be drafted in a way that seems harmless but creates serious problems when a dispute arises. Recent court decisions have shown exactly how these traps work in practice.

Trap 1: The Indemnification vs. Advancement Gap

In a case currently before the Manhattan Commercial Division, fashion designer Elie Tahari and his son Jeremy learned firsthand how a single word in an operating agreement can change everything.

The Taharis formed an LLC with Bluestar Alliance, a consumer brand management company, in 2017. Tahari contributed his fashion brand for licensing. When the relationship broke down, Bluestar sued the Taharis for breach of fiduciary duty and tortious interference. The Taharis asked the LLC to advance their legal fees while the case was pending.

Here is where the drafting trap appeared. The operating agreement had two separate provisions:

• Section 4.1(a) — Indemnification: This covered claims arising "in connection with the Company."

• Section 4.1(b) — Advancement: This had no such limitation. It was drafted more broadly.

Justice Anar R. Patel of the Manhattan Commercial Division ruled that because the advancement provision lacked the narrowing language found in the indemnification provision, the Taharis were entitled to advancement of their legal fees. The different wording in the two subsections was intentional, and the court enforced it.

What does this mean for you? If you are a member or manager of an LLC, your operating agreement may promise you indemnification but not advancement. That means the LLC will reimburse your legal costs after the case is over, but you have to pay out of pocket while the litigation is ongoing. For a complex commercial case in New York, that can mean hundreds of thousands of dollars in legal fees before you see a dime back.

How to Protect Yourself

• Make sure your operating agreement includes both indemnification and advancement provisions

• Ensure the advancement clause covers claims arising from your role as a member or manager, without unnecessary limitations

• If the indemnification clause uses narrow language like "in connection with the Company," check whether the advancement clause uses the same restriction

Trap 2: The Anti-Dissolution Waiver

In New York, LLC Law Section 702 gives members the right to petition a court for judicial dissolution when the business relationship has broken down beyond repair. You can seek dissolution when managers are acting illegally, fraudulently, or oppressively, when LLC assets are being wasted, or when it is no longer reasonably practicable to carry on the business.

But what if your operating agreement says you waived that right?

In TZ Vista, LLC v. Helmer, the Second Department of the Appellate Division enforced an anti-dissolution waiver for the first time at the appellate level. The members had formed an LLC for a mixed-use waterfront development in Nyack, New York. The operating agreement stated that each member "irrevocably waives" the right to sue for dissolution. When one member tried to get out, the court said the waiver was binding.

This decision sent shockwaves through the New York business community. If you signed an operating agreement with a dissolution waiver, you may be trapped in the LLC with no legal way out, even if your partners are mismanaging the business or freezing you out of decisions.

However, this is not settled law. Other New York courts have refused to enforce similar waivers, particularly when they are used to oppress minority members. The issue may eventually reach the Court of Appeals for a definitive ruling.

What You Can Do

• Before signing any operating agreement, look for language that waives your right to seek judicial dissolution

• If there is a dissolution waiver, insist on a buyout provision as an alternative exit mechanism

• If you are already in an LLC with a dissolution waiver and the relationship is breaking down, consult a commercial litigation attorney immediately. The waiver may not be enforceable depending on the circumstances

Trap 3: The Unilateral Amendment Clause

The third trap is perhaps the most alarming. The New York Court of Appeals ruled in Behler v. Tao that if an LLC operating agreement grants the managing member the right to unilaterally amend the agreement, those amendments are binding on all members, even if the other members never agreed to the changes.

Think about what this means in practice. You join an LLC. The operating agreement looks fair. But the managing member has the right to amend the agreement without your consent. A year later, the managing member adds an anti-dissolution waiver. Or changes the profit-sharing formula. Or adds a non-compete clause that restricts your ability to work in your industry.

You never agreed to any of these changes, but under the Court of Appeals ruling, they may still apply to you.

Red Flags to Watch For

• Any provision that allows one member to amend the agreement without unanimous consent

• Language that says the managing member can modify "any provision" of the agreement

• No requirement for written notice to other members before an amendment takes effect

• No carve-outs protecting fundamental rights like profit distributions, voting rights, or dissolution rights from unilateral amendment

Why This Matters for NYC Business Owners Right Now

New York City has more LLCs than almost any market in the country. Real estate partnerships, restaurant groups, tech startups, professional service firms, and retail businesses are all commonly structured as LLCs. Many of these businesses use operating agreements that were drafted quickly or downloaded from the internet.

The cases discussed above show that the operating agreement is the single most important document in your business. A few words can mean the difference between having your legal fees paid by the company or paying them yourself. Between having the right to exit a bad partnership or being trapped in it. Between controlling your own business terms or having them changed without your knowledge.

Pending Legislation: Personal Liability for LLC Members

Making matters more complex, a pending bill in the New York Senate (S4611) would extend personal wage liability to LLC members. Currently, the top ten shareholders of a corporation can be held personally liable for unpaid employee wages under Business Corporation Law Section 630. This bill would apply the same rule to the top ten members of an LLC.

If passed, this would be a significant change for LLC members who assumed the LLC structure shielded them from personal liability for employee wages. It is another reason to review your operating agreement and understand your exposure.

Frequently Asked Questions

What is the difference between indemnification and advancement in an LLC operating agreement?

Indemnification reimburses legal costs after a case is resolved, while advancement requires the LLC to pay legal fees as they are incurred, before the outcome is known. These are separate rights that must be drafted carefully. A recent Manhattan Commercial Division ruling showed that subtle wording differences between these two provisions can produce dramatically different results.

Can my LLC operating agreement prevent me from suing for dissolution in New York?

Possibly. In TZ Vista, LLC v. Helmer, the Second Department enforced an anti-dissolution waiver for the first time at the appellate level. However, New York courts remain split on this issue, and a waiver may not hold up if it is being used to oppress a minority member.

Can a majority member change the LLC operating agreement without my consent?

Yes, if the operating agreement grants unilateral amendment rights to the majority or managing member. The New York Court of Appeals upheld this in Behler v. Tao. This means a controlling member could add restrictive provisions after you have already invested in the LLC.

What should I look for before signing an LLC operating agreement in New York?

Review the indemnification and advancement clauses to ensure they cover you as a manager or member. Check for anti-dissolution waivers that could trap you. Examine the amendment provisions to see who can change the agreement. And make sure there is a buyout mechanism so you have a way out if the relationship breaks down.

The Bottom Line

Your LLC operating agreement is not just paperwork. It is the rulebook for your most important business relationships. Recent New York court decisions have shown that a few poorly drafted clauses can cost you millions. Whether you are forming a new LLC or already in one, take the time to review your agreement with an experienced commercial litigation attorney.

If you or someone you know is dealing with an LLC dispute, a business divorce, or a partnership conflict, the team at Yassi Law PC is ready to help. Call us today at 646-992-2138 for a consultation.

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Written by Reza Yassi | LinkedIn

This article is for informational purposes only and does not constitute legal advice. Although I am an attorney, I am not your attorney, and reading this article does not create an attorney-client relationship. Laws vary by jurisdiction and may have changed since the publication of this article. For advice specific to your situation, consult a qualified attorney.