Operating Agreement

An operating agreement is the foundational governance document for a Limited Liability Company (LLC). It defines ownership percentages, profit and loss allocation, management structure (member-managed vs manager-managed), voting rights, capital contribution requirements, distribution rules, and procedures for adding or removing members. Functionally the LLC equivalent of corporate bylaws plus shareholder agreement combined into one document, it is required by some states (sometimes called "company agreement" in Texas or "regulations" elsewhere). It is the most-important document an LLC ever creates because it overrides state-law defaults that are usually unfavorable to the members.

The major sections of a typical LLC operating agreement: members and ownership (who owns what percentage, capital contributions, classes of membership interests if applicable), management structure (member-managed where all members have authority, or manager-managed where one or more managers control day-to-day operations), profit and loss allocation (which can be non-pro-rata to ownership for specific tax structures), distributions (when and how profits are distributed; mandatory vs discretionary), voting (what decisions require what majorities; major decisions like new members or asset sales typically require supermajority), transfer restrictions (when and how members can sell their interests; usually requires consent of other members), buy-sell provisions (what happens if a member dies, becomes disabled, leaves, or wants to exit), dispute resolution (mediation/arbitration provisions), and dissolution (what triggers winding up the company). The states that legally require an operating agreement: California, Delaware, Maine, Missouri, New York; most other states recommend it but don't require it. The 2020s reality: most online formation services (Bizee/Incfile, Northwest Registered Agent, LegalZoom) include a template operating agreement; for multi-member LLCs with significant capital or complex structures, custom drafting with a real attorney is worth the typical $2K to $10K fee because the template doesn't anticipate specific member arrangements.

Ryan's Take

The operating agreement is what makes the LLC actually function as the members intended; without it, you're governed by your state's default LLC rules, which are written to be administratively safe and usually don't match what the members actually want. Multi-member LLCs without a real operating agreement is one of the most common small-business legal disasters: the members assumed they had clarity, didn't write it down, and now they're in litigation over who owns what, who decides what, and what happens when one of them wants out. Spend the $5K on a real lawyer-drafted operating agreement at formation. It's the cheapest dispute-prevention you'll ever buy.

What founders get wrong: Using a template operating agreement for multi-member LLCs without customizing the major decisions (voting thresholds, transfer restrictions, buy-sell provisions). The template handles the basics but not the founder-specific situations that create disputes later. Get real legal help if more than one person owns the LLC.

Related: [LLC] · [Bylaws] · [Shareholder Agreement] · [Founders Agreement]

FAQ

What is an operating agreement? The foundational governance document for an LLC, defining ownership percentages, profit and loss allocation, management structure, voting rights, capital contributions, distributions, and procedures for adding or removing members. Functionally the LLC equivalent of corporate bylaws plus shareholder agreement combined.

Is an operating agreement legally required? Required by law in California, Delaware, Maine, Missouri, and New York. Most other states recommend it but don't strictly require one. Even where not required, having one is strongly advisable: without it, the LLC is governed by state default rules that rarely match what the members actually want.

Can I use a template operating agreement? For single-member LLCs, yes; template documents from formation services like Bizee, Northwest Registered Agent, or LegalZoom work fine. For multi-member LLCs with meaningful capital or complex structures, custom drafting with an attorney ($2K-$10K) is worth the cost because templates don't anticipate specific member arrangements that create disputes.