What Is an Operating Agreement?

An Operating Agreement is a written contract between the members of an LLC that outlines how the company will operate.

The agreement establishes internal rules for managing the business and addresses issues that state default LLC laws may not fully cover.

An Operating Agreement commonly includes:

• LLC name
• Principal business address
• Purpose of the company
• Member information
• Ownership percentages
• Capital contributions
• Management structure
• Voting rights
• Profit and loss allocations
• Member responsibilities
• Admission of new members
• Transfer of ownership interests
• Dissolution procedures
• Signature requirements

Operating Agreements are commonly used for:

• Single-member LLCs
• Multi-member LLCs
• Family businesses
• Real estate investment companies
• Consulting firms
• E-commerce businesses
• Professional service companies
• Startup businesses

A properly drafted Operating Agreement provides a clear framework for managing the LLC.

Why an Operating Agreement Is Important

Without an Operating Agreement, an LLC is generally governed by default state laws, which may not reflect the members’ intentions.

An Operating Agreement helps:

• Define ownership interests
• Protect limited liability status
• Clarify management authority
• Establish voting procedures
• Allocate profits and losses
• Reduce member disputes
• Plan for future ownership changes
• Strengthen business credibility

A written agreement provides certainty and flexibility for the members.

Before You Start Creating an Operating Agreement

Before preparing the agreement, the LLC members should discuss how they want the company to operate.

Important information may include:

• LLC legal name
• State of formation
• Business purpose
• Member information
• Ownership percentages
• Initial capital contributions
• Management structure
• Profit distribution plans
• Future growth plans

Careful planning helps create a more effective Operating Agreement.

Step-by-Step Guide to Creating an Operating Agreement

Step 1. Identify the LLC

The agreement should clearly identify the company.

Include:

• Full legal name of the LLC
• State of formation
• Principal business address
• Date of formation

This information identifies the company governed by the agreement.

Step 2. Identify the Members

The agreement should list every LLC member.

For each member, include:

• Full legal name
• Address
• Ownership percentage
• Initial capital contribution

Accurate member information establishes ownership of the company.

Step 3. Describe the Purpose of the LLC

The agreement should explain the company’s primary business activities.

Examples include:

• Real estate investment
• Consulting services
• Online retail
• Professional services
• Software development
• Property management
• Manufacturing

Some agreements use a broad purpose clause that allows the LLC to engage in any lawful business activity.

Step 4. Define Capital Contributions

Each member’s contribution to the LLC should be documented.

Contributions may include:

• Cash
• Equipment
• Real estate
• Intellectual property
• Business assets
• Services (where permitted)

The agreement should also explain whether members may be required to make additional contributions in the future.

Step 5. Establish Ownership Percentages

The Operating Agreement should specify each member’s ownership interest.

Ownership may be based on:

• Equal ownership
• Capital contributions
• Negotiated percentages
• Other agreed methods

Ownership percentages often affect voting rights and profit distributions.

Step 6. Choose the Management Structure

An LLC may be managed in different ways.

The agreement should specify whether the LLC is:

Member-Managed

All members participate in managing the business.

Manager-Managed

One or more designated managers operate the company on behalf of the members.

Clearly identifying the management structure helps define authority within the business.

Step 7. Define Voting Rights

The agreement should explain how important business decisions will be made.

Voting methods may include:

• One vote per member
• Voting based on ownership percentages
• Majority approval
• Supermajority approval
• Unanimous consent for major decisions

Clear voting procedures help prevent management disputes.

Step 8. Explain Profit and Loss Allocations

The Operating Agreement should specify how profits and losses will be shared.

Common methods include:

• Ownership percentages
• Equal allocations
• Special allocations agreed by the members

The agreement should also explain when distributions will be made.

Step 9. Address Member Changes

The agreement should explain what happens if membership changes.

Include procedures for:

• Admitting new members
• Voluntary withdrawal
• Retirement
• Death or disability
• Sale of ownership interests
• Expulsion where permitted

Planning for future ownership changes helps maintain business stability.

Step 10. Include Recordkeeping and Financial Procedures

The agreement should explain how company records will be maintained.

Topics may include:

• Accounting methods
• Fiscal year
• Bank accounts
• Financial reporting
• Tax matters
• Record retention

Good financial procedures support proper business operations.

Step 11. Establish Dissolution Procedures

The agreement should explain how the LLC may be dissolved.

Include:

• Events triggering dissolution
• Member approval requirements
• Asset distribution procedures
• Payment of company debts
• Final accounting

These provisions provide a roadmap if the company closes.

Step 12. Review the Operating Agreement Before Signing

Before signing, all members should carefully review the agreement.

Important items to verify include:

• Member information
• Ownership percentages
• Capital contributions
• Management structure
• Voting procedures
• Profit distributions
• Membership changes
• Dissolution provisions

A careful review helps ensure the agreement accurately reflects the members’ intentions.

How to Sign an Operating Agreement

The Operating Agreement becomes effective after the required members sign the document.

The agreement should include:

• Signature of each member
• Printed names
• Date of signing

Although notarization is generally not required, members should retain signed copies for their records.

Keep Copies of the Signed Agreement

Every member should retain a copy of the completed Operating Agreement.

Copies may be useful for:

• Company records
• Banking relationships
• Tax preparation
• Financing applications
• Internal governance
• Resolving disputes

Maintaining organized records supports the long-term operation of the LLC.

Common Mistakes to Avoid

When creating an Operating Agreement, common mistakes include:

• Not documenting ownership percentages
• Using vague management provisions
• Ignoring voting procedures
• Failing to address member departures
• Omitting profit distribution rules
• Overlooking dissolution procedures
• Relying solely on state default laws
• Failing to obtain member signatures

A carefully prepared Operating Agreement helps protect both the LLC and its members.

Frequently Asked Questions

Is an Operating Agreement Required for Every LLC?

Requirements vary by state. Even where not required, most LLCs benefit from having a written Operating Agreement.

Can a Single-Member LLC Have an Operating Agreement?

Yes. A single-member LLC can use an Operating Agreement to document ownership and reinforce the separation between the owner and the business.

Can an Operating Agreement Be Changed?

Yes. Members may amend the agreement according to the amendment procedures described in the document.

What Is the Difference Between Articles of Organization and an Operating Agreement?

Articles of Organization are filed with the state to form the LLC, while the Operating Agreement governs the LLC’s internal operations and member relationships.

Does an Operating Agreement Control Profit Distributions?

Yes. The agreement generally explains how profits and losses are allocated and when distributions may be made.

Does an Operating Agreement Need to Be Notarized?

Most Operating Agreements do not require notarization, although specific business situations or lender requirements may differ.

Conclusion

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