LLC's taxed as partnerships must meet the "substantial economic effect" test of Treasury Reg. § 1.704-1(b)(2) for the allocation of income, losses and other items. This is an especially important point in regard to pass-through LLC losses as a deduction could be denied by the IRS if it finds the allocation lacks substantial economic effect. There are two alternative tests for providing that allocations by an LLC have substantial economic effect.
Under the first test, the LLC operating agreement must unconditionally obligate all members with a negative capital account to restore the amount of such deficit balance to the LLC by the end of the taxable year during which liquidation occurs (or, if later, within 90 days after the date of such liquidation). Treas. Reg. § 1.704-1(b)(2)(ii)(b)(3). One of the main reasons people find the LLC form attractive for business is it's limited liability feature. If the operating agreement requires all members to repay capital account deficits upon the liquidation of the LLC, this could make them liable to some degree for LLC debts. For obvious reasons, this is not an attractive option for complying with the substantial economic effect requirement.
The alternate test for substantial economic effect is less draconian. It requires the LLC operating agreement to contain a "qualified income offset" (in addition to other requirements). In laymans terms (to the best of my reading of the regulations), a qualified income offset merely suspends any special allocations to an LLC member that would increase a capital deficit and requires the LLC to allocate income or gain to the member to eliminate any the negative capital account as quickly as possible. For an example of such a provision, see this operating agreement at Section 6.2(c). Another common way one sees for addressing "qualified income offset" requirement in LLC operating agreement is including the following short phrase: "To the extent a Member shall have a negative capital account balance, there shall be a qualified income offset, as set forth in Treasury Regulation 1.704-l(b)(2)(ii)(d)." I personally prefer more of an explanation of what the offset entails but I have seen no ruling for the IRS indicating that this phrase is inadequate. For more extensive sample language, click here and language contained in PLR 145623-04.
For more on this topic, see Federal Income Taxation of LLC Members By Charles R. Beaudrot.