What is an Operating Agreement?

An operating agreement is a written legal agreement among the members of your Limited Liability Company (LLC). The operating agreement explains how your company will be run, the rights and responsibilities of LLC members, the process adding and removing LLC members, and other important operating rules. While LLC operating agreements are not mandatory in all states, it's generally advisable for LLCs to have an operating agreement  in place.

LLC operating agreements can be created either at the time of the LLC’s formation, or at anytime after formation.

Other names for LLC Operating Agreements.

When researching LLC operating agreements, bear in mind that they may also be referred to as:

  • LLC Agreement

  • Operating Agreement

  • LLC Bylaws

  • LLC Operations Agreement

  • LLC Setup Agreement

Why Are Operating Agreements Important?

There are a number of reasons to create an operating agreement. Operating agreements provide the following important benefits:

  • Minimize the number and impact of managerial disagreements.

  • Protect the limited liability status of your company.

  • Allows you to create the business structure that best suits your specific needs.

  • Most importantly, without an operating agreement, state laws may dictate how your company will be run.

Potential issues from running your LLC without  an Operating Agreement

  • An LLC operating agreement reinforces your limited liability status and helps to ensure that that you, as an individual, are legally separate from your business. Conversely, running your company without an LLC operating agreement could damage your personal finances.

  • A properly written operating agreement clearly lays out the rules and procedures for the management of your business and prevents problems that could arise from misunderstandings. Without an operating agreement, managerial disputes can remain unresolved, often resulting in lawsuits against your company and among the members.

  • By putting an operating agreement in place, you proactively set the rules under which you will operate your company.

  • Without an operating agreement, state rules may apply that could result in the loss of personal control of your business, as well as your business running less efficiently.

Common Mistakes in Operating Agreements

  • Failing to have all members sign the operating agreement.

  • Neglecting to update the agreement when important changes occur.

  • Including rules that are not allowed under state law.

  • No rules for departing members.

  • Not fully explaining member duties.

Frequently Asked Questions

  • Does my business need an operating agreement?

If you run an LLC, an operating agreement is essential in order to avoid unnecessary misunderstandings and disputes between partners, to ensure that your LLC runs smoothly and efficiently, and to keep the state from interfering in how you choose to run your company.

  • What should be in the operating agreement?

Generally speaking, your operating agreement should include:

  • Rules for bringing in new members.
  • Member exit rules.
  • Member voting powers, rights and responsibilities.
  • Member ownership percentages.
  • Management rules and procedures
  • Rules governing allocation of profits and losses.
  • Language regarding first refusal and purchase rights.
  • Meeting and voting rules and procedures.

Other sections and rules may be required. Legal professionals can you to draft an operating agreement that includes the most important provisions.

  • Am I legally required to have an operating agreement?

Only certain states, such as California and New York, require operating agreements. However it is recommended for all LLCs to create operating agreements.

Steps to File an Operating Agreement

There is no requirement to file your operating agreement with the state. The operating agreement is merely intended for your records and to be referenced whenever an issue or disagreement occurs. It is recommended that you keep additional copies of your LLC operating agreement on file and easily accessible to all members.

Whether you are forming a new LLC or are already running an LLC without an operating agreement, you can post your legal need in UpCounsel's marketplace to find a competent attorney to assist you in drafting one. Only 5% of attorneys who apply to UpCounsel are accepted on to the platform, so you can be assured that your business will receive top-tier legal help from professionals from the country’s best law schools.