What to Know About Operating Agreements
No matter what kind of business you run, having an operating agreement is important. An operating agreement gives you a chance to explain how your LLC will function. This legal document isn’t required by the state to set up a limited liability company, but business experts all agree that creating this document before serving customers is ideal. We’ve put together some information about operating agreements. It explains what this document is and how to create one.
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An LLC operating agreement is a legal document that defines how your LLC is owned, managed, and operated. It covers everything from profit distribution and member responsibilities to what happens if a member leaves or the business dissolves.
Even though most states don’t legally require one, an operating agreement is essential for protecting your personal liability and preventing member disputes.
What Is an LLC Operating Agreement?
An operating agreement is an internal document — you don’t file it with the state. It’s a contract between the LLC’s members that establishes:
- Each member’s ownership percentage
- How profits and losses are divided
- Who manages the business (member-managed vs. manager-managed)
- Voting rights and decision-making procedures
- What happens when a member wants to leave, dies, or becomes incapacitated
- How the LLC can be dissolved
Without an operating agreement, your LLC defaults to your state’s LLC act — which may not align with what you and your co-owners actually want. For example, most state default rules split profits equally among members, regardless of how much each person invested.
Is an Operating Agreement Required?
Only a few states legally require LLCs to have an operating agreement. But every LLC should have one, regardless of state law.
| Requirement Level | States |
|---|---|
| Required by law | California, Delaware, Maine, Missouri, Nebraska, New York |
| Required for multi-member LLCs | Several states require operating agreements only when there are two or more members |
| Not required but recommended | All other states — while not mandatory, courts and banks expect LLCs to have one |
Even in states that don’t require it, you’ll need an operating agreement to:
- Open a business bank account — Most banks ask for your operating agreement
- Prove LLC legitimacy in court — Without one, a judge may question whether your LLC is a real business entity, weakening your liability protection
- Attract investors — Investors want to see formalized ownership and governance
- Override state defaults — State default rules may not match your intentions for profit splitting, voting, or management
What to Include in an Operating Agreement
A thorough operating agreement should cover these key sections:
1. Organization Details
- LLC name and principal address
- Date of formation
- State of formation
- Purpose of the LLC (keep this broad: “any lawful business activity”)
- Duration (perpetual is standard)
2. Member Information and Ownership
- Names and addresses of all members
- Each member’s ownership percentage
- Each member’s initial capital contribution (cash, property, or services)
- Rules for additional capital contributions
3. Profit and Loss Distribution
- How profits are divided (proportional to ownership, or a custom split)
- When distributions are made (monthly, quarterly, annually)
- Whether members are guaranteed minimum distributions
- How losses are allocated
4. Management Structure
There are two management options:
- Member-managed: All members participate in daily business decisions. Best for small LLCs where all owners are active in the business.
- Manager-managed: One or more designated managers (who may or may not be members) run the business. Best for LLCs with passive investors or a large number of members.
Your operating agreement should specify which structure you’re using and what authority managers have.
5. Voting Rights and Decision-Making
- What decisions require a member vote
- Voting weight (usually proportional to ownership)
- Majority vs. unanimous vote requirements for different types of decisions
- Procedures for holding meetings and recording votes
6. Transfer of Membership Interests
- Can members sell or transfer their ownership interest?
- Do other members have a right of first refusal?
- How is a departing member’s interest valued?
- Restrictions on who can become a new member
7. Member Withdrawal, Death, or Incapacity
- What happens if a member wants to leave
- Buy-sell provisions (buyout terms and timeline)
- What happens upon a member’s death or disability
- Whether remaining members can continue the LLC
8. Dissolution Provisions
- Events that trigger dissolution
- Required vote to dissolve
- Process for winding up affairs and distributing assets
- See our guide on how to dissolve an LLC for the full process
9. Amendment Procedures
- How the operating agreement can be changed
- Vote requirement for amendments (typically unanimous or supermajority)
Single-Member vs. Multi-Member Operating Agreements
| Single-Member LLC | Multi-Member LLC | |
|---|---|---|
| Complexity | Simple (1-3 pages) | Detailed (5-20+ pages) |
| Profit distribution | 100% to sole member | Must define split (equal, proportional, or custom) |
| Management | Sole member manages | Must specify member-managed or manager-managed |
| Voting | Not applicable | Must define voting rights and thresholds |
| Transfer/buyout | Not applicable | Critical — defines exit terms |
| Dispute resolution | Not applicable | Essential (mediation, arbitration, or litigation) |
| Why you need it | Proves LLC is separate from you personally (protects liability shield) | Prevents disputes and ensures everyone agrees on terms |
For single-member LLCs: Your operating agreement is mainly about establishing the LLC as a separate legal entity. Without it, a court could “pierce the corporate veil” and hold you personally liable for business debts.
For multi-member LLCs: Your operating agreement is the rulebook that prevents disagreements from becoming lawsuits. Cover every scenario — especially what happens when someone wants out.
How to Create an Operating Agreement
You have three options:
Option 1: Use a Free Template ($0)
Suitable for simple single-member LLCs. Many LLC formation services provide a basic template. Our top pick, Northwest Registered Agent, includes a free operating agreement template with every formation.
Option 2: Use an Online Legal Service ($50-$200)
Services like LegalZoom, Rocket Lawyer, and LawDepot offer customizable operating agreement generators. You answer questions about your LLC, and the service generates a tailored document. Good for multi-member LLCs with straightforward terms.
Option 3: Hire a Business Attorney ($500-$2,000)
Recommended for multi-member LLCs with complex arrangements — like unequal capital contributions, different classes of membership interests, or specific buyout terms. An attorney ensures your agreement complies with state law and covers all potential disputes.
How to Amend an Operating Agreement
Business circumstances change, and your operating agreement should change with them. Common reasons to amend:
- Adding or removing members
- Changing ownership percentages
- Switching from member-managed to manager-managed (or vice versa)
- Updating profit distribution terms
- Adding new business activities
To amend your operating agreement:
- Follow the amendment procedure outlined in your existing agreement (typically requires a majority or unanimous member vote)
- Draft the amendment in writing
- Have all members sign the amendment
- Attach the amendment to the original operating agreement
You don’t need to file amendments with the state — the operating agreement is an internal document.
Frequently Asked Questions
Can I write my own operating agreement?
Yes. There’s no legal requirement to use a lawyer. For single-member LLCs, a free template is usually sufficient. For multi-member LLCs with complex terms, an attorney is worth the investment to prevent future disputes.
Does a single-member LLC need an operating agreement?
Technically, most states don’t require it. Practically, yes — you need one. An operating agreement is your primary evidence that the LLC is a separate entity from you personally. Without it, courts may disregard your LLC’s liability protection. Banks may also refuse to open a business account without one.
What happens if you don’t have an operating agreement?
Your LLC defaults to your state’s LLC act, which includes generic rules for profit sharing, management, and dissolution. These defaults may not match your intentions. For multi-member LLCs, the lack of a written agreement is a common source of expensive legal disputes.
Is an operating agreement the same as articles of organization?
No. Articles of organization are filed with the state to officially create your LLC. An operating agreement is an internal document that governs how the LLC operates. You need both, but only articles of organization are filed with the state.
How long does it take to create an operating agreement?
Using a template: 30-60 minutes. Using an online service: 1-2 hours. With an attorney: 1-2 weeks (including drafting, review, and revisions). The time investment depends on complexity — a single-member LLC takes much less time than a multi-member LLC with custom terms.
Can an operating agreement be changed later?
Yes. Operating agreements can be amended at any time, following the amendment procedure outlined in the agreement itself. Most agreements require a majority or unanimous vote of members to approve changes. Always put amendments in writing and have all members sign.
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