What Is an Operating Agreement for an LLC?
An operating agreement is a legal document that outlines the rules and procedures related to the operation of an LLC. It describes the responsibilities of the LLC’s members and managers, and it can serve as a guide for financial and day-to-day operational decision-making.
An operating agreement is similar to a corporation’s bylaws or a partnership agreement.
Do I Need an Operating Agreement?
Only five states legally require LLCs to have an operating agreement: California, Delaware, Maine, Missouri, and New York.
However, it’s strongly recommended that all LLCs have an official operating agreement — even if they aren’t located in one of those states. This applies to both single-member LLCs and multi-member LLCs.
What Should an Operating Agreement Include?
The contents of an operating agreement can vary a bit from company to company, but there is some information commonly included in most of them.
Below you’ll find examples of what to cover in your operating agreement, but make sure to check your state’s requirements if your LLC is based in California, Delaware, Maine, Missouri, or New York.
- LLC’s Name and Address
- Registered Agent’s Name and Address
- Duration of the LLC
- Business Purpose
- Names of Members: These are the owners.
- Members’ Capital Contribution and Ownership Percentage: It’s important to have a record of the amount of capital each member contributed to the LLC as well as their ownership stake in the company.
- Members’ Voting Rights: How much voting power does each member have? Each member could have a single vote. Alternatively, an LLC could weight its members’ votes based on their ownership percentage or allocate voting power in some other way. Whatever the voting rights, clearly stating them in the operating agreement is essential.
- Members’ Responsibilities and Powers: Describing what powers and responsibilities each member has and does not have can help avoid confusion or conflict in the future.
- Process of Distributing Profits and Losses to Members: Will the LLC distribute profits and losses equally, based on ownership percentage, or in some other way?
- Process and Requirements for Adding New Members: How can the LLC add new members? Do all current members need to agree to add new members or will it only require a majority vote? What’s the minimum capital contribution required of new members?
- Buyout and Sellout Procedures: If a member wants to leave the LLC — or the other members want to remove a member — how will this be done? How will the LLC transfer the departing member’s ownership stake? How will it determine the value of that stake?
- Management Structure: Is this a single-member or multi-member LLC? Is it a member-managed or manager-managed company?
- Responsibilities of Managers: For which parts and operations of the LLC does each member or manager have responsibility? Who has access to the LLC’s financial records?
- Meeting Requirements and Procedures: How often should the LLC hold official meetings? What are the voting and record-keeping procedures during these meetings?
- Dissolution Procedures: How will the LLC wind down if the members decide to close the company? How will any remaining assets or property be distributed?
- Amendment Procedures: Members may decide they want to change or add certain rules or procedures of the operating agreement. How will they vote on and implement these changes or updates?
- Non-Compete, Non-Disclosure, and Conflict of Interest Agreements: Outlining the rules about privacy and members’ business activities outside the LLC can help avoid confusion and conflict down the road.
- Liability Clause: Clearly stating the members’ personal liability can strengthen the LLC’s “corporate veil” and protect the members’ personal assets.
Operating Agreement Development Process
Ideally, you would create an operating agreement as you form your LLC and before you start conducting business (and some states may require you to do so).
While you don’t need to file your operating agreement with any government office (unlike your Articles of Organization), you should have it notarized and then keep it in a safe place. The operating agreement should remain confidential, but each member should receive a copy.
Operating Agreement FAQ
How do I create an operating agreement?
The easiest way to create an operating agreement is with a free operating agreement template. You can use the template as a guideline and customize the sections as you see fit.
Does an operating agreement need to be notarized?
No, it’s not required to notarize an operating agreement. However, some businesses will have their operating agreements notarized to make things feel more “official.”
Do you need an operating agreement?
Only five states — California, Delaware, Maine, Missouri, and New York — require LLCs to have an operating agreement. However, it’s strongly recommended that all LLCs have one regardless of their location.
What’s the difference between an operating agreement and bylaws?
An operating agreement covers the operations of an LLC while bylaws cover the operations of a corporation.
Is there an operating agreement template?
Yes, there are many operating agreement templates available online. We recommend using this free operating agreement template to help you get started.
Do single-member LLCs need an operating agreement?
If your LLC is based in one of the five states that require LLCs to have an operating agreement (California, Delaware, Maine, Missouri, and New York), then you must create an operating agreement — even if your company is a single-member LLC. However, it’s also recommended that single-member LLCs located outside those five states have operating agreements.
How much does an operating agreement cost?
You can create an operating agreement using our free template to minimize costs. This template provides sample articles and sections that you can customize to fit your LLC’s needs.
You can also pay for a template or professional help. Some formation services include operating agreements in their package prices, while others charge about $20-$200 for operating agreement services. Enlisting the help of an attorney or professional will also require an additional fee.
Where do you file an operating agreement?
You don’t need to file an operating agreement with any government or financial office. In fact, you should keep your operating agreement confidential and store it in a safe place.
What if an LLC has no operating agreement?
If an LLC doesn’t have an operating agreement, its operating procedures will be subject to the default laws of the state — and those laws can vary.
Additionally, not having an operating agreement can increase the chances of confusion or conflict between members if issues arise down the road and there’s no procedure in place for how to handle them.