Key Takeaways:

  • An LLC operating agreement outlines the management, member responsibilities, and operational rules of your business.
  • While not required in all states, having an operating agreement can protect limited liability status and prevent disputes.
  • Without an operating agreement, state default rules may dictate how your LLC operates, potentially reducing your control over business decisions.
  • Key elements of an operating agreement include voting rights, profit and loss allocation, decision-making authority, and dispute resolution procedures.
  • Businesses that lack an operating agreement may face legal and financial risks, such as member disputes and challenges to limited liability status.
  • Operating agreements can be customized to suit specific business needs and prevent misunderstandings among members.
  • Consulting an operating agreement lawyer ensures compliance with state laws and thorough legal protection for all members.

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 for 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 any time after formation.

Essential Components of an LLC Operating Agreement

An LLC operating agreement should be comprehensive to ensure smooth operations and prevent legal disputes. Key components typically include:

  • Ownership Structure – Specifies each member’s ownership percentage.
  • Voting Rights and Decision-Making – Details how decisions are made and the weight of each member’s vote.
  • Profit and Loss Distribution – Defines how profits and losses will be shared among members.
  • Roles and Responsibilities – Clarifies managerial duties and operational responsibilities.
  • Dispute Resolution – Establishes procedures for resolving conflicts among members.
  • Member Changes and Exit Strategies – Outlines rules for adding or removing members and handling member exits.
  • Dissolution Terms – Specifies how the LLC will be dissolved if necessary.

A well-drafted operating agreement can help avoid costly disputes and ensure the business operates according to the members' intentions.

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.

Legal and Financial Benefits of an Operating Agreement

An LLC operating agreement provides several crucial benefits, including:

  • Preserving Limited Liability Status – Ensures courts recognize the LLC as a separate legal entity, protecting personal assets.
  • Avoiding Default State Rules – Prevents state-imposed operating rules that may not align with the members’ intentions.
  • Clarifying Business Operations – Establishes clear rules for decision-making, profit distribution, and dispute resolution.
  • Strengthening Business Credibility – Banks, investors, and partners often require an operating agreement for financial transactions.
  • Preventing Member Disputes – Reduces the likelihood of misunderstandings that could lead to legal battles.

Consulting an operating agreement lawyer can help ensure your agreement meets legal requirements and serves the best interests of all members.

Potential issues from running your LLC without  an Operating Agreement

  • An LLC operating agreement reinforces your limited liability status and helps to ensure 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.

Legal Risks of Not Having an Operating Agreement

Failing to draft an LLC operating agreement can expose your business to various legal risks:

  • State Default Rules Apply – Without a formal agreement, state law will dictate how your LLC operates, which may not align with your business goals.
  • Disputes and Litigation – Lack of defined management roles and profit-sharing rules can lead to disagreements among members.
  • Limited Liability Protection at Risk – Courts may “pierce the corporate veil” if there’s no clear separation between personal and business finances.
  • Challenges in Attracting Investors or Lenders – Many financial institutions require an operating agreement before approving loans or investments.
  • Difficult Member Exits – Without predefined rules for member departures, disputes over buyouts or ownership transitions may arise.

An operating agreement lawyer can help draft an agreement that mitigates these risks and protects your business.

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.

How to Draft a Strong LLC Operating Agreement

To ensure your operating agreement is legally sound and comprehensive, consider the following best practices:

  1. Customize for Your Business – Avoid generic templates and tailor the agreement to your specific industry and business structure.
  2. Ensure Legal Compliance – Work with an operating agreement lawyer to comply with state laws and prevent enforceability issues.
  3. Define Key Business Terms Clearly – Outline decision-making processes, profit-sharing, and member responsibilities in unambiguous language.
  4. Include Buy-Sell Provisions – Specify how ownership interests can be transferred if a member exits.
  5. Regularly Review and Update – Revisit your agreement periodically to reflect changes in business structure or state regulations.

A well-drafted agreement minimizes disputes and keeps your business legally protected.

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.

Frequently Asked Questions

  1. Is an LLC operating agreement legally required?
    • Some states, such as California and New York, require LLCs to have an operating agreement, but it is recommended in all states for legal protection.
  2. Can I write my own operating agreement?
    • While you can draft one yourself, hiring an operating agreement lawyer ensures it meets legal standards and covers all necessary aspects.
  3. How does an operating agreement protect my LLC?
    • It outlines ownership, financial rules, and decision-making processes, preventing internal disputes and protecting limited liability status.
  4. Can an LLC operate without an operating agreement?
    • Yes, but state default rules will govern the LLC, which may not align with your business needs and could lead to conflicts.
  5. How often should an LLC update its operating agreement?
    • It should be reviewed and updated regularly, especially when adding new members, changing ownership percentages, or altering business operations.

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 onto 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.