LLC Operating Agreement
Key takeaways
* An LLC operating agreement is a binding internal document that defines how a limited liability company is owned, managed, and run.
* It clarifies ownership percentages, voting and management rights, profit/loss allocation, and procedures for adding or removing members.
* Many states don’t require one, but it’s strongly recommended; a few states (e.g., California, Missouri, New York) require it.
* Without an operating agreement, state default rules govern the LLC — which may not match the members’ intentions.
What is an LLC operating agreement?
An LLC operating agreement is a written contract among an LLC’s members that customizes the company’s internal rules and procedures. It governs financial and managerial decision‑making, member rights and responsibilities, and what happens if a member leaves, dies, or the LLC dissolves. Once signed, it becomes the LLC’s binding rulebook; absent one, courts and state law apply default rules.
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Why it matters
* Protects limited liability: a clear separation between the business and members helps maintain protection of personal assets.
* Prevents disputes: written rules reduce ambiguity about ownership shares, profit distribution, voting, and management.
* Flexibility: unlike corporate bylaws, operating agreements let members tailor governance and economic arrangements to their needs.
* Legal and practical compliance: some states require an operating agreement, and having one strengthens the LLC’s formal status with banks, investors, and courts.
How it works
An operating agreement sets the LLC’s internal structure. Typical agreements run 10–20 pages and cover how the business is managed (member‑managed or manager‑managed), how decisions are made and recorded, and how profits and losses flow to members. The agreement can also specify amendment procedures, buy‑sell terms for member exits, capital contribution rules, and tax treatment elections. If members don’t adopt an agreement, state statutes supply default rules that may mandate equal profit sharing or other provisions that conflict with members’ intentions.
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Essential elements to include
* Member ownership percentages (capital contributions)
* Voting rights and decision‑making procedures
* Management structure and duties (member‑managed vs. manager‑managed)
* Profit and loss allocation and distribution timing
* Meeting rules and voting thresholds
* Transfer, buyout, and buy‑sell provisions (including death, disability, or resignation)
* Admission of new members and capital call procedures
* Tax classification and how tax liabilities will be allocated
* Duration of the LLC and principal place of business
* Definitions of key terms and procedures for amending the agreement
Common questions
– Do I still need a business plan?
No legal requirement, but a business plan complements the operating agreement by setting goals, strategy, and performance metrics.
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Can an LLC issue stock like a corporation?
No. LLC membership interests are not corporate stock. Members can share profits and voting power, but an LLC cannot issue shares like a corporation. -
How does an LLC differ from a partnership?
Partnerships often form informally and can expose partners to personal liability for business debts. An LLC provides limited liability protection and formalizes governance through an operating agreement. -
Can an operating agreement be amended?
Yes. Most agreements include amendment procedures (e.g., unanimous vote or specified majority). If not specified, state default rules apply. -
Does a single‑member LLC need an operating agreement?
Even single‑member LLCs benefit from an operating agreement to document separation between personal and business assets and to set successor rules. Some states require one regardless of member count.
Conclusion
An operating agreement is a core document for any LLC. It gives members control over governance and economic arrangements, protects limited liability, and reduces reliance on generic state defaults. Drafting a clear operating agreement at formation — and updating it as the business evolves — is a practical step to prevent disputes and preserve the LLC’s intended structure.