Non-Competes Between LLC Members: Enforceability by State (2026 Update)

Member Non-Competes vs Employee Non-Competes

Non-compete law is in flux nationally, but the rules for LLC member non-competes are DIFFERENT from employee non-competes. Most state laws restricting non-competes carve out or treat more leniently:

- Non-competes signed as part of sale of a business - Non-competes between LLC members or partners in a business they co-own - Non-competes tied to equity ownership

The rationale: member non-competes protect legitimate business interests (goodwill, customer relationships, trade secrets developed jointly) in a context where both parties are business owners, not just employees with no bargaining power.

This article focuses on non-competes between LLC members — the kind you put in an operating agreement or a separate covenant when co-owners join or leave.

The FTC Ban: What Happened and What It Means

In April 2024, the Federal Trade Commission issued a final rule banning most non-competes between employers and employees. The rule was:

- Set to take effect September 4, 2024 - Blocked nationally by a Texas federal court in August 2024 - Status as of 2026: still in legal limbo, tied up in appeals

Critically, even if the FTC ban survives legal challenges, it: - Does NOT apply to non-competes related to the sale of a business - Does NOT apply to non-competes between partners/members in a partnership or LLC (when that relationship is genuinely as co-owners, not a disguised employment arrangement) - DOES apply to employment non-competes, even for highly paid executives (with a narrow "senior executive" grandfather for existing non-competes)

For LLC member non-competes, the FTC ban is mostly irrelevant. State law continues to control.

State-by-State Enforceability Overview

States That Broadly Enforce Reasonable Non-Competes

Most states will enforce a non-compete between LLC members if it's reasonable as to: - **Scope** (activities prohibited) - **Geography** (area covered) - **Duration** (how long it lasts)

These states apply a "reasonable under the circumstances" test, often modifying overly broad non-competes ("blue-penciling") rather than striking them entirely.

Generally enforceable with reasonable scope: - Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming

States With Strict Restrictions

These states have specific statutes limiting non-competes, but most carve out sale-of-business and member agreements:

**California**: generally bans non-competes, but CA Business & Professions Code §16601 permits non-competes in connection with the sale of a business, and §16602 permits non-competes among partners in a dissolving partnership. LLC membership non-competes in operating agreements are in a gray area — CA courts have both enforced and rejected them depending on facts. If the non-compete is tied to ownership transfer or dissolution, it's more likely enforceable.

**Colorado**: Colorado HB 22-1317 (effective August 2022) generally voids non-competes for workers earning under $112,500 (2024 threshold). Sale-of-business and LLC member non-competes are generally enforceable if the member has meaningful ownership (not just a token interest).

**District of Columbia**: DC's Ban on Non-Compete Agreements Amendment Act (2022) bans most employment non-competes. Doesn't address member non-competes directly, so operating agreement provisions likely still enforceable.

**Illinois**: Illinois Freedom to Work Act restricts non-competes for employees earning under $75K. Member non-competes not directly addressed and generally enforceable.

**Maine**: Act to Promote Keeping Workers in Maine (2019) bans non-competes for low-wage workers. Member non-competes enforceable.

**Massachusetts**: Noncompetition Agreement Act (2018) applies to employee non-competes but explicitly does NOT apply to non-competes in connection with the sale of a business or the ownership interest in a business.

**Minnesota**: MN Statute §181.988 (effective July 2023) voids most new non-competes BUT carves out non-competes in connection with sale of a business and non-solicit agreements.

**New Hampshire**: recent statute restricting non-competes for low-wage workers. Member non-competes enforceable if reasonable.

**North Dakota**: generally voids non-competes (ND Cent. Code §9-08-06), but has an exception for sale of a business. Member non-competes in operating agreements are sometimes enforced if tied to ownership transfer.

**Oklahoma**: Oklahoma Okla. Stat. §15-219A generally voids non-competes EXCEPT for sale of a business and related transactions. Member non-competes in operating agreements can qualify under the sale-of-business carve-out in certain transactions.

**Washington**: Washington RCW §49.62 voids non-competes for employees earning under ~$120K (indexed). Member non-competes in operating agreements are generally enforceable.

States With Near-Total Bans (Even on Member Non-Competes)

- **California**: near-total ban on non-competes; LLC operating agreement non-competes often unenforceable UNLESS structured as a sale-of-business or dissolution covenant - **North Dakota**: broad ban; narrow exceptions - **Oklahoma**: broad ban; narrow exceptions

If your LLC has members in CA, ND, or OK, consult an attorney before adding a non-compete to the operating agreement.

What Makes an LLC Member Non-Compete "Reasonable"?

Courts in enforcing states look at:

1. Legitimate business interest The LLC must have something worth protecting: - Customer relationships - Trade secrets or confidential processes - Specialized training or unique know-how - Goodwill built over time

Generic "don't compete with us" without specific interests = less enforceable.

2. Scope (activities) What's the member prohibited from doing? - Too broad: "any business" or "any work in the industry" - Reasonable: "the specific business the LLC engages in" or "similar services to our customer base"

3. Geographic scope Where is the member restricted? - Too broad: "nationwide" for a regional business - Reasonable: area where the LLC actually operates or plans to operate - For online businesses: "the United States" or similar broad area is increasingly accepted since the business itself is nationwide

4. Duration How long does the non-compete last? - Common for member non-competes: 1-3 years after exit - 6 months to 1 year: generally enforceable - 2 years: often enforceable - 3 years: sometimes enforceable for sale-of-business - 5+ years: usually too long unless clearly tied to major business purchase

5. Consideration What did the member receive for agreeing? - Membership interest itself (often sufficient as consideration at formation) - Increased distributions or salary - Specialized training or customer introduction - Sale proceeds

A non-compete added AFTER the member joined, with no new consideration, is often unenforceable.

The Standard LLC Operating Agreement Non-Compete

A typical operating agreement provision looks like:

> "During the term of Member's membership and for a period of **[12-24] months** thereafter, Member shall not, directly or indirectly: > (a) Engage in, or have any financial interest in, any business that competes with the Company in [geographic scope]; > (b) Solicit or attempt to solicit any customer, supplier, or employee of the Company; > (c) Use or disclose any Confidential Information of the Company. > > The parties agree this restriction is reasonable, is supported by the consideration of Member's membership interest in the Company, and is necessary to protect the Company's legitimate business interests in [list specific interests]."

Critical elements: - Specific time period - Specific geography - Specific business definition - Acknowledgment of reasonableness - Identification of legitimate interests - Blue-pencil clause: "If any restriction is deemed overbroad, the court may modify it to the maximum reasonable scope"

Non-Solicit vs Non-Compete

"Non-solicit" is narrower and easier to enforce: - Can't contact/solicit customers of the LLC - Can't poach employees or contractors - Can still WORK in the industry, just not for the LLC's specific relationships

Many states that restrict non-competes still allow reasonable non-solicits. For an LLC member, a non-solicit may achieve most of what you want with much less enforceability risk.

Common non-solicit duration: 12-24 months.

Confidentiality / Non-Disclosure

Confidentiality provisions are ALMOST ALWAYS enforceable regardless of state law on non-competes. They protect trade secrets, customer lists, pricing, methods, and other confidential business information.

A good LLC operating agreement has: - Specific list of confidential information categories - Return-of-information clause on exit (all LLC documents, contacts, records returned) - Perpetual obligation for true trade secrets - Time-limited obligation (3-5 years) for general confidential info - Specific exclusions (information that becomes public through no fault of the member)

When Is a Non-Compete Worth Including?

Include in operating agreement if: - You have members who bring specialized skill that took time/investment to develop - Customer relationships are key to the business and members have direct contact - You operate in a niche where post-exit competition would materially harm the LLC - You're bringing on investors or outside members

Usually skip if: - Single-member LLC (no one to restrict) - Members all have the same role with no differentiated customer relationships - You're in California, North Dakota, or Oklahoma (enforceability issues) - The competitive concern is fully addressed by confidentiality + non-solicit

Buy-Back Rights as a Non-Compete Alternative

Many operating agreements handle competition risk differently:

- **Mandatory buyout on competition**: if a member starts or joins a competing business, the LLC can force the member to sell their interest at book value (or a discount) - **Drag-along buyback**: member who wants to leave and compete must sell interest at fair market value at the LLC's option - **Forfeiture of vested interest**: if member competes, they forfeit unvested equity

These mechanisms achieve competition protection without relying on non-compete enforceability and are generally enforceable as a matter of contract.

Enforcement: What Actually Happens When a Member Competes

Realistic scenario Member leaves the LLC and starts a competing business 6 months later. The LLC discovers this through customer inquiries or industry gossip.

LLC's options: 1. **Send a cease-and-desist letter**: often resolves without litigation 2. **File suit for injunctive relief**: court orders member to stop competing pending trial 3. **Sue for damages**: lost profits, disgorgement of member's profits 4. **Exercise buyback right**: force member to sell their interest (cheaper than litigation)

Realistic costs and outcomes: - Sending a cease-and-desist: $500-$2,000 attorney fee - Preliminary injunction motion: $20,000-$75,000 - Full litigation through judgment: $200,000-$750,000+ - Success rate: highly fact-dependent, but LLCs with good documentation and reasonable non-competes win more often than not

The deterrent effect of a well-drafted non-compete often matters more than the ability to actually enforce it. Most departing members comply rather than risk litigation.

Practical Drafting Guide

Step 1: Consult state law Look up your state's current rules (they change frequently). Most state attorney general websites have a "non-compete" page. Avoid drafting blind.

Step 2: Start with the narrowest restriction that achieves the goal - If confidentiality + non-solicit is enough, skip the non-compete - If you need a non-compete, make it specific to the actual competitive threat

Step 3: Document legitimate interests In the operating agreement, list specifically what you're protecting (customer relationships, trade secrets, etc.). This helps on enforcement.

Step 4: Add blue-pencil clause "If a court finds any part of this provision unenforceable, it should be modified to be enforceable rather than stricken."

Step 5: Consider garden-leave alternative Some LLCs pay departing members during the non-compete period (like a severance). This makes enforcement much easier because there's clear consideration for the restriction.

Step 6: Get attorney review Especially if the LLC has high-value trade secrets or members in different states. A $1,500 review is cheap insurance.

Summary: Quick Reference

| State | Member Non-Compete Enforceability | |---|---| | CA | Generally unenforceable (narrow exceptions) | | CO | Enforceable with meaningful ownership | | MA | Enforceable (explicit carve-out from employee rules) | | MN | Enforceable (sale-of-business carve-out) | | NY | Enforceable with reasonable scope | | TX | Enforceable with reasonable scope | | WA | Enforceable (sale-of-business carve-out) | | Most others | Enforceable with reasonable scope |

For a current, customized operating agreement with state-appropriate non-compete language, use our [operating agreement generator](/tools/operating-agreement) or consult a business attorney in your state.