Alabama LLC governance: an operating agreement that can shape the duties, a good-faith floor it cannot cross, and an equal-shares default

Alabama governs LLCs under the Limited Liability Company Act of 2014, a modern act built on the prototype model, and it sits between the two camps that divide the states. It is not a pure freedom-of-contract state, where an operating agreement can erase the duties members and managers owe, and it is not a strict floor state, where the duties are largely fixed. Alabama lets the operating agreement define and limit the duties of loyalty and care, giving a drafter real room to fit them to a business, while keeping the obligation of good faith as a line the agreement cannot cross. The act also reached backward when it took effect, sweeping every older Alabama LLC into its rules in 2017. Those are the features to understand, ahead of the general mechanics on the site’s default rules and freedom of contract guides.

Duties the agreement can shape, to a point

Start with how far Alabama lets the operating agreement go on duties.

Alabama’s operating agreement can define and limit the duties of loyalty and care, but it cannot eliminate the obligation of good faith and fair dealing.

Under Ala. Code Section 10A-5A-1.08, an Alabama operating agreement may shape the fiduciary duties: it can identify categories of activity that do not violate the duty of loyalty and can set standards for the duty of care, so long as the terms are not manifestly unreasonable. That is more latitude than a strict floor state such as Connecticut or South Carolina allows, and it is valuable for a real estate operation where the same people are on both sides of affiliated leases and management arrangements that a rigid loyalty rule would treat as suspect. But the latitude has a hard limit: the obligation of good faith and fair dealing cannot be eliminated. So an Alabama agreement can tailor and narrow the duties, but it cannot license bad faith, and a manager who wants the benefit of that flexibility has to use it deliberately in the agreement, because the defaults that apply without drafting are closer to the ordinary fiduciary standards.

The equal-shares default

On the economics, Alabama’s default surprises unequal partners.

When an Alabama operating agreement is silent, distributions are shared equally among the members, regardless of who contributed more.

Under Ala. Code Section 10A-5A-4.05, distributions are shared equally among the members by default, a per-capita rule rather than one weighted by contribution, so a member who put in most of the capital receives the same share as one who put in little unless the operating agreement provides otherwise. For a real estate venture with unequal contributions, which is most of them, that default does not track the deal the members actually struck, and an explicit distribution and allocation provision is essential. This is the routine but costly gap: an Alabama LLC formed from a generic template, with no real operating agreement, defaults to an even split that no one intended. Management defaults to the members unless the agreement provides for managers.

Bringing an older LLC current

The transition is worth acting on if the LLC predates the act.

Every Alabama LLC came under the 2014 act on January 1, 2017, so a pre-2015 operating agreement should be read against the current statute.

Under Ala. Code Section 10A-5A-12.01, the 2014 act governed new LLCs from January 1, 2015, and then swept all existing Alabama LLCs into its rules on January 1, 2017, when the old Chapter 5 was repealed. So an LLC formed years ago now lives under Chapter 5A, and an operating agreement drafted under the prior law should be re-read against the current act to confirm its duty and distribution provisions still do what they were meant to do. The through-line for Alabama is that the operating agreement carries real weight here: it can shape the duties within the good-faith limit, it must set the distribution split to avoid the equal-shares default, and if it predates 2015 it should be brought current so it operates under the act that now governs it.

The bottom line

Alabama’s 2014 act lets the operating agreement define and limit the duties of loyalty and care under Section 10A-5A-1.08, more room than a strict floor state gives.

The obligation of good faith and fair dealing cannot be eliminated, so the agreement can shape the duties but not license bad faith.

Distributions default to equal shares under Section 10A-5A-4.05, so an LLC with unequal contributions must set the split in the agreement.

Every Alabama LLC came under the 2014 act on January 1, 2017, so a pre-2015 agreement should be re-read against the current statute.

The practical course is a real operating agreement that uses the act’s flexibility deliberately, sets the distribution split, and is current with Chapter 5A.

What this page does not cover

This page is about the rules that run your company from the inside. How creditors reach a member’s interest, the elite charging order, and the foreign-LLC condition are on the protection page. Alabama’s 5% income tax, the federal-tax deduction, the protected series LLC, and the business privilege tax are on the structure and cost page. The $200 formation fee, the end of the annual report, and the initial tax return are on the filing page.

Last verified August 2026.