LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership structure, management rules, and operating procedures of a Limited Liability Company. Think of it as the rulebook for how your LLC will be run.

While your Articles of Organization create the LLC with the state, the operating agreement governs the internal affairs of the business. It covers everything from how profits are divided to what happens if a member wants to leave.

The operating agreement is a private document — it is not filed with the state. It is kept internally by the members and only shared with banks, lenders, or courts when needed.

Even if your state does not legally require an operating agreement, having one is considered a best practice for every LLC, whether you are the sole member or share ownership with others.

There are several compelling reasons to have an operating agreement, even if you are the only member:

1. Protect Your Limited Liability

Courts are more likely to respect the separation between you and your LLC if you have a formal operating agreement. Without one, it becomes easier for a creditor or plaintiff to argue that your LLC is not a real, separate entity — and "pierce the corporate veil" to reach your personal assets.

2. Override Default State Rules

If you do not have an operating agreement, your LLC is governed by your state's default LLC laws. These default rules may not align with what you want. For example, many states default to equal profit splitting among members regardless of their capital contributions. An operating agreement lets you set your own terms.

3. Prevent and Resolve Disputes

For multi-member LLCs, an operating agreement is essential for preventing conflicts. It clearly spells out each member's rights, responsibilities, and share of profits. When disagreements arise, the operating agreement serves as the reference document.

4. Bank and Lender Requirements

Many banks require an operating agreement to open a business bank account. Lenders and investors often want to see one before extending credit or investment to the LLC.

5. Clarify Tax Treatment

The operating agreement can specify how the LLC will be taxed and how distributions will be handled, ensuring all members are on the same page regarding tax obligations.

A thorough operating agreement should address the following areas:

Single-Member LLC Operating Agreement

Even though you are the only owner, a single-member operating agreement serves important purposes. It reinforces the legal separation between you and the LLC, which strengthens your liability protection. It also satisfies bank requirements and puts basic rules in writing — such as how the LLC is taxed, who manages it, and what happens if you pass away.

Single-member agreements are simpler and typically 2 to 5 pages long. They focus on confirming the sole member's authority, capital contribution, and basic dissolution procedures.

Multi-Member LLC Operating Agreement

Multi-member operating agreements are more complex and typically 10 to 30+ pages. They need to address profit splitting, decision-making authority, dispute resolution, exit procedures, and many other scenarios that can arise when multiple people share ownership of a business.

For multi-member LLCs, we strongly recommend having an attorney review or draft the operating agreement. The cost of legal help upfront (typically $500 to $2,000) is far less than the cost of litigation if disputes arise later.

Operating agreement requirements vary by state. Here is a general overview:

• States that require an operating agreement: New York, California, Delaware, Maine, and Missouri all have laws that either require or strongly expect LLCs to have an operating agreement.
• States that do not require one but recommend it: Most other states do not legally require an operating agreement but strongly recommend them. State default rules apply in the absence of one.

Regardless of whether your state requires it, having one is always recommended. The cost and effort are minimal compared to the protection and clarity it provides.

You have several options for creating your operating agreement:

Free Templates from Formation Services

Many LLC formation services include a basic operating agreement template. For example, ZenBusiness includes one in their Starter plan, and Northwest Registered Agent provides one with their formation package. These are adequate for simple, single-member LLCs.

Online Legal Platforms

Services like LegalZoom offer customizable operating agreement templates for $100 to $200. These are a step up from free templates and include some customization options.

Attorney-Drafted Agreements

For multi-member LLCs, complex ownership structures, or businesses with significant assets, hiring an attorney is the best choice. Expect to pay $500 to $2,000 for a custom operating agreement. Services like LLC Attorney include attorney-drafted operating agreements as part of their formation package.

Your operating agreement is not a static document. As your business evolves, your operating agreement should evolve with it. There are several common situations that call for an amendment:

• Adding or removing members. Whenever someone joins or leaves the LLC, the operating agreement should be updated to reflect the new ownership structure, capital contributions, and profit allocations.
• Changing the management structure. If your LLC transitions from member-managed to manager-managed (or vice versa), the agreement should document this change clearly.
• Modifying profit distribution. If the members agree to a new formula for splitting profits and losses — for example, to reflect changing roles or additional capital investments — the operating agreement must be amended accordingly.
• Changing the tax election. If your LLC elects S-Corp taxation (by filing Form 2553 with the IRS), your operating agreement should be updated to reflect the new tax treatment and any related requirements, such as reasonable salary provisions. See our LLC vs S-Corp guide for more information.
• Updating dissolution or buyout terms. As the business grows in value, you may want to revise how departing members' interests are valued and purchased.

The process for amending the operating agreement should be spelled out in the agreement itself. Typically, amendments require a vote by the members (either majority or unanimous, depending on the provision) and must be documented in writing with all members' signatures. Keep a copy of every amendment alongside the original agreement.

Whether you use a template or hire an attorney, keep these tips in mind to ensure your operating agreement is effective and protects all parties:

1. Be specific about decision-making authority. Vague language like "members will manage the company" invites confusion. Spell out exactly who can sign contracts, open bank accounts, make purchases above a certain threshold, hire or fire employees, and take on debt. For multi-member LLCs, clarify which decisions require unanimous consent versus a simple majority vote.
2. Include a dispute resolution clause. Disputes happen in every business partnership. Your operating agreement should define a process for resolving disagreements — such as mediation first, then arbitration, before any party can file a lawsuit. This can save tens of thousands of dollars in legal fees.
3. Address what happens when a member passes away. Without clear succession provisions, the death of a member can throw the LLC into chaos. Specify whether the deceased member's interest transfers to their estate or heirs, whether surviving members have the right to purchase the interest, and how the interest is valued.
4. Define "capital calls" and future contributions. If the LLC needs additional funding in the future, who is obligated to contribute? What happens if a member cannot or refuses to contribute their share? These situations need to be addressed upfront.
5. Include non-compete and confidentiality provisions. For multi-member LLCs, consider including restrictions on members competing with the LLC or sharing confidential business information. These provisions protect the business if a member leaves to start a competing venture.
6. Review it annually. Even if nothing has changed, an annual review of your operating agreement ensures it remains current and that all members still understand and agree to its terms. This is also a good time to verify that the agreement complies with any changes in state LLC laws.

1. Not having one at all. This is the biggest mistake. Without an operating agreement, your LLC is governed by state default rules that may not reflect your intentions.
2. Using a generic template without customization. Every LLC is different. A one-size-fits-all template may not address your specific needs, especially for multi-member LLCs.
3. Failing to address exit scenarios. What happens when a member dies, gets divorced, or simply wants out? Without clear buyout and exit provisions, these situations can become extremely contentious and expensive to resolve.
4. Not updating it as circumstances change. If you add new members, change profit-sharing arrangements, or alter the management structure, your operating agreement should be amended to reflect those changes.
5. Ignoring tax provisions. The operating agreement should clearly state how the LLC will be taxed and how distributions will be handled, especially if they differ from ownership percentages.