If you’ve recently formed an LLC (or you’re thinking about it) you’ve probably heard the term “operating agreement”. Maybe you’re wondering if it’s just another piece of paperwork you can skip, or if it’s actually something that matters for your business.
The short answer: Yes, you need one. Even if your state doesn’t require it.
An operating agreement is one of the most important documents you’ll create for your LLC, and skipping it can lead to confusion, disputes, and even legal problems down the road. In this guide, we’ll break down what an operating agreement is, why it matters, what should be in it, and how to get one that actually protects your business.
What Is an Operating Agreement?
An operating agreement is a legal document that outlines how your LLC will be run. Think of it as the rulebook for your business. It spells out who owns what, how decisions get made, what happens if someone wants to leave, and how profits and losses are distributed.
While your Articles of Organization (the document you file with the state to create your LLC) establish that your business exists, your operating agreement defines how it operates internally. It’s an agreement between the LLC’s members (owners) about the structure, management, and financial arrangements of the company.
Is an Operating Agreement Required by Law?
This depends on your state. Most states don’t legally require LLCs to have an operating agreement, but a few do:
- California – Required within 90 days of filing
- Delaware – Recommended and enforceable under state law
- Maine – Required
- Missouri – Required
- New York – Required
Even if your state doesn’t require you to, you should still have one. Here’s why: without one, your LLC will be governed by your state’s default LLC laws. Those laws are generic and may not reflect how you actually want to run your business. If a dispute arises, the courts will apply those default rules and they may not be what you intended.
Why You Need an Operating Agreement (Even for Single-Member LLCs)
Many business owners assume that if they’re the sole owner of their LLC, they don’t need an operating agreement. That’s a mistake. Here’s why every LLC—even single-member LLCs—should have one:
1. It Protects Your Limited Liability Status
One of the main reasons people form LLCs is to separate their personal assets from business liabilities. But if you don’t have an operating agreement, a court could decide that your LLC isn’t a legitimate separate entity—it’s just you doing business under a different name. This is called “piercing the corporate veil,” and it can put your personal assets at risk in a lawsuit.
Having a written operating agreement helps prove that your LLC is a real, separate business entity with its own rules and structure.
2. It Prevents Misunderstandings Between Co-Owners
If you have partners in your LLC, an operating agreement is essential. It clarifies who’s responsible for what, how profits are split, and what happens if someone wants to sell their share or leave the business. Without it, you’re setting yourself up for conflict.
Even among friends or family members, money and business decisions can cause friction. An operating agreement puts everything in writing so there’s no room for “I thought we agreed on…” situations later.
3. It Overrides State Default Rules
Every state has default LLC laws that kick in if you don’t have an operating agreement. These rules might not work for your business. For example, in many states, the default rule is that profits and losses are split equally among members—even if one person contributed more money or does more work.
An operating agreement lets you customize those rules to fit your situation.
4. It Makes Your Business More Credible
When you apply for a business loan, open a bank account, or bring on investors, lenders and financial institutions often ask to see your operating agreement. It shows that your business is organized, professional, and legally sound.
5. It Helps With Succession Planning
What happens to your LLC if you die or become incapacitated? What if a member wants to leave or gets divorced? Your operating agreement can address all of these scenarios, making transitions smoother and avoiding costly legal battles.
What Should Be Included in Your Operating Agreement?
Every LLC is different, but most operating agreements should include the following sections:
1. Organization and Formation
This section includes basic information about your LLC:
- Legal name of the LLC
- Principal place of business
- Purpose of the business
- Date of formation
- Duration (most LLCs are perpetual, meaning they continue indefinitely)
2. Ownership Structure and Capital Contributions
This details who owns what percentage of the LLC and what each member contributed to the business (cash, property, services, etc.). It’s important to be specific here, especially if contributions weren’t equal.
For example:
- Jane contributed $50,000 in cash and owns 50%
- John contributed $30,000 in cash and owns 30%
- Sarah contributed equipment worth $20,000 and owns 20%
3. Management Structure
LLCs can be managed in two ways:
- Member-managed: All members participate in day-to-day decisions
- Manager-managed: Members appoint one or more managers (who may or may not be members) to run the business
Your operating agreement should specify which structure you’re using and outline the responsibilities and authority of managers or managing members.
4. Voting Rights and Decision-Making
How are decisions made? This section should cover:
- What decisions require a vote vs. what can be made by managers alone
- How votes are weighted (by ownership percentage, or one vote per member?)
- What percentage constitutes a majority for different types of decisions
- How meetings are called and conducted
5. Profit and Loss Distribution
How will profits and losses be divided among members? The most common approach is to distribute them according to ownership percentage, but you can structure this however you want.
For example, you might agree that one member gets a larger share of profits in exchange for doing more of the work, even if ownership percentages are equal.
6. Member Changes and Transfers of Ownership
This section addresses what happens when someone wants to join or leave the LLC:
- Can members sell or transfer their ownership interest?
- Do remaining members have the right of first refusal (the option to buy before an outsider can)?
- What happens if a member dies, becomes disabled, or gets divorced?
- How are new members admitted?
- What’s the buyout process if someone wants to leave?
This is one of the most important sections, as it prevents disputes when circumstances change.
7. Dissolution and Winding Up
What happens if the LLC needs to close? This section outlines:
- Under what circumstances the LLC can be dissolved
- Who has the authority to dissolve the company
- How assets will be distributed
- How debts and obligations will be handled
Single-Member Operating Agreements: What’s Different?
If you’re the only owner of your LLC, your operating agreement will be simpler, but you still need one. A single-member operating agreement should include:
- Your ownership percentage (100%)
- Management structure (you’re the sole manager)
- How you’ll handle distributions
- Succession planning (what happens if you die or become incapacitated)
- Dissolution procedures
Even though you’re the only member, having this in writing protects your liability shield and makes your business more credible to banks and other institutions.
How to Create an Operating Agreement
You have a few options for creating your operating agreement:
Option 1: Use a Template
There are many free and paid templates available online.
A standard operating agreement can work if your LLC has a simple structure, but be careful—generic templates might not address your specific situation or comply with your state’s laws.
Option 2: Hire an Attorney
For more complex LLCs (multiple members, significant capital contributions, unique arrangements), it’s worth hiring a business attorney to draft or review your operating agreement. This ensures it’s legally sound and tailored to your needs.
Option 3: Use a Professional Formation Service
Many registered agent and LLC formation services offer operating agreement preparation as part of their packages. In fact, if you form your LLC with URA, we include an Operating Agreement template with our premium package. These typically still must be customized but are a great starting point for many LLCs.
Common Mistakes to Avoid
1. Not Having One at All
This is the biggest mistake. Don’t assume you can just “figure it out later.” Get your operating agreement in place as soon as your LLC is formed.
2. Using a One-Size-Fits-All Template Without Customization
Templates are fine as a starting point, but make sure you actually read through it and customize it for your specific business. Don’t just fill in the blanks and call it done.
3. Not Updating It When Circumstances Change
Your operating agreement isn’t a set-it-and-forget-it document. If you add members, change your management structure, or make other significant changes to your business, update your operating agreement to reflect that.
4. Being Vague or Incomplete
Don’t leave important details to chance. Be specific about ownership percentages, decision-making processes, and what happens in various scenarios. Vague language leads to disputes.
5. Not Keeping It With Your Business Records
Your operating agreement should be kept with your other important business documents. You don’t file it with the state, but you should have it readily available when needed (for example, when opening a bank account or applying for a loan). Ideally, any paper copies of documents should be stored safely and digital copies should be located in a password protected location.
Do You Need to File Your Operating Agreement With the State?
No. Unlike your Articles of Organization, you don’t file your operating agreement with the state. It’s an internal document that stays with your business records. However, you should keep copies in a safe place and make sure all members have access to it.
Can You Change Your Operating Agreement Later?
Yes. Your operating agreement should include a section that explains how amendments can be made. Typically, changes require a vote of the members, with a certain percentage needed to approve (often a majority or supermajority).
It’s a good idea to review your operating agreement periodically—especially when major business changes occur—to make sure it still reflects how your LLC operates.
What Happens If You Don’t Have an Operating Agreement?
If you don’t have an operating agreement, your LLC will be governed by your state’s default LLC laws. This means:
- Profits and losses may be split equally, regardless of who contributed more
- Decision-making rules will follow state law, which may not match your preferences
- Member departures, deaths, or transfers could trigger automatic dissolution of the LLC
- Disputes among members will be resolved using state law, not your actual intentions
In other words, you lose control over how your business operates. And if something goes wrong, you could end up in court trying to sort it out—an expensive and time-consuming process.
Final Thoughts: Don’t Skip the Operating Agreement
An operating agreement might seem like just another piece of paperwork, but it’s one of the most important documents for your LLC. It protects your liability shield, prevents disputes, gives you control over how your business operates, and makes your company more credible to lenders and investors.
Whether you’re a solo entrepreneur or running an LLC with partners, take the time to create a solid operating agreement. It’s an investment in your business’s long-term success—and it could save you from costly problems down the road.
If you need help creating an operating agreement or want to ensure your LLC is set up correctly from the start, Universal Registered Agents can help. We offer comprehensive LLC formation services and can connect you with the resources you need to build a strong foundation for your business.
Ready to get your LLC’s paperwork in order? Contact us today to learn more about our services.
