What Is an LLC Operating Agreement? (And Do You Need One?)
An LLC operating agreement is a legal document that outlines ownership, management structure, and operating procedures for your LLC. Even in states that don't require one, having an operating agreement protects your personal liability shield and prevents costly disputes.
What Is an LLC Operating Agreement?
An LLC operating agreement is an internal document that defines how your LLC will be run. Think of it as the rulebook for your business — it spells out who owns what, who makes decisions, and what happens if things change.
Unlike your Articles of Organization (which you file with the state), the operating agreement stays private. It's a contract between the LLC members that covers ownership percentages, profit distribution, voting rights, and procedures for adding or removing members.
Even single-member LLCs benefit from having one. Without an operating agreement, your state's default LLC laws govern your business — and those defaults might not match what you actually want.
Pro Tip
Your operating agreement doesn't need to be filed with any government agency. Keep the signed original in a safe place and give copies to all members.
Why You Need an Operating Agreement
The biggest reason: protecting your personal assets. Courts have "pierced the corporate veil" (held owners personally liable) when an LLC can't prove it operates as a separate entity. An operating agreement is one of the strongest pieces of evidence that your LLC is legitimate.
For multi-member LLCs, an operating agreement prevents disputes before they happen. Without one, a 50/50 partnership has no tiebreaker mechanism, profit splits default to state law (which may not match your verbal agreement), and there's no clear process for a member wanting to leave.
Banks and investors typically require one too. When you open a business bank account, apply for a loan, or seek outside investment, you'll likely be asked to provide your operating agreement. Not having one signals that your business isn't well-organized.
What to Include in Your Operating Agreement
Every operating agreement should cover these core areas: member information (names, addresses, ownership percentages), capital contributions (how much each member invested), profit and loss distribution (how money gets split), and management structure (member-managed vs. manager-managed).
You'll also want sections on voting rights and decision-making (what requires unanimous consent vs. majority vote), transfer restrictions (can a member sell their interest to anyone?), dissolution procedures (how to wind down the business), and dispute resolution (mediation, arbitration, or litigation).
Don't forget the practical details: meeting requirements, record-keeping responsibilities, how new members can join, and what happens if a member dies or becomes incapacitated. These "what if" scenarios feel unnecessary until they aren't.
Pro Tip
Include a provision for amending the agreement itself. Business circumstances change, and you'll want a clear process for updating the rules.
Single-Member vs. Multi-Member Operating Agreements
A single-member operating agreement is simpler since there's no one to disagree with. It primarily establishes that the LLC is a separate entity, defines management authority, and outlines basic operating procedures. Most are 3–5 pages.
A multi-member operating agreement is more complex and more critical. It needs to address profit-sharing formulas, voting procedures, buyout provisions, non-compete clauses, and what happens when members disagree. Expect 10–20 pages for a thorough one.
The biggest difference comes down to exit provisions. A single-member agreement just addresses dissolution. A multi-member agreement needs detailed buy-sell provisions, valuation methods, and right-of-first-refusal clauses to prevent messy breakups.
Free vs. Paid Templates: What's the Difference?
Free templates (like ours) cover the fundamental provisions every LLC needs. They're a solid starting point for straightforward businesses — especially single-member LLCs or simple partnerships with equal ownership splits.
Paid templates ($50–$200) and attorney-drafted agreements ($500–$2,000) add customization, state-specific language, and provisions for complex scenarios. If your LLC involves unequal ownership, outside investors, intellectual property contributions, or unique profit-sharing arrangements, investing in a customized agreement is usually worth it.
Here's the honest truth: a free template that you actually use is infinitely better than an expensive one you never get around to. Start with a template, and upgrade to a custom agreement if your situation becomes more complex.
How to Create Your Operating Agreement
Start by gathering information: each member's full legal name and address, capital contributions (cash and non-cash), desired ownership percentages, and how you want to split profits. If you're a single member, decide how you want management authority documented.
Next, choose a template and customize it. Fill in your specific details, remove any provisions that don't apply, and add any unique arrangements your LLC needs. Read every section carefully — don't just fill in blanks without understanding what each clause means.
Have all members review and sign the final document. While notarization isn't required in most states, it adds an extra layer of legitimacy. Store the original securely and distribute copies to all members.
Pro Tip
If you have a multi-member LLC with more than $50,000 in combined capital contributions, spend the $500–$1,000 to have an attorney review your agreement. The cost is trivial compared to the potential for disputes.
State Requirements for Operating Agreements
Only a handful of states legally require an operating agreement: California, Delaware, Maine, Missouri, and New York. But "not legally required" doesn't mean "not important" — it just means the state won't penalize you for not having one.
In states without a requirement, your LLC defaults to state law for anything not covered by an operating agreement. These defaults vary significantly. For example, some states default to equal profit splits regardless of capital contributions, while others distribute profits proportional to investment.
Even if your state doesn't require one, banks, courts, and other businesses expect to see an operating agreement when dealing with an LLC. Treat it as a practical necessity, not an optional extra.
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Frequently Asked Questions
Is an LLC operating agreement required by law?
Only in California, Delaware, Maine, Missouri, and New York. However, every LLC should have one regardless of state requirements. It protects your personal liability shield, prevents disputes, and is often required by banks and lenders.
Can I write my own LLC operating agreement?
Yes. Many LLC owners use a template and customize it. For single-member LLCs and simple partnerships, a well-crafted template works fine. For complex ownership structures or large investments, hiring an attorney ($500–$2,000) is recommended.
Does an operating agreement need to be notarized?
No state requires notarization of an LLC operating agreement. However, having it notarized adds legitimacy and can be helpful if the agreement is ever challenged in court. All members should sign and date the document.
Can I change my operating agreement after forming my LLC?
Yes. Operating agreements can be amended at any time with the consent outlined in the agreement itself (usually unanimous or majority member approval). Document any changes in a written amendment signed by all members.