What Is an Operating Agreement for an LLC, and Do You Need One?

A limited liability company, commonly called an LLC, is a flexible entity that can protect your individual assets without sacrificing control over your small business. It’s a popular legal structure to consider when making your business official. If you decide to form an LLC, there are things to prepare before formally starting your business, including an operating agreement.

An operating agreement is important because it outlines your LLC’s provisions, regulations, and rules. It’s also important so that members of your LLC can all know how the business is supposed to function. While a single-member LLC is similar to a sole proprietorship in that one person is responsible for everything, that's not true for many LLCs. An LLC operating agreement allows you to define each member’s role in the organization.

Read on for a high-level overview of LLC operating agreements.

What is an operating agreement for an LLC?

Your LLC operating agreement serves an important purpose. It’s a document that outlines how the LLC will be run and the rights and responsibilities of each member. It gives the owners of the LLC, known as “members,” a concrete plan for how they will operate the business together. 

The agreement should include instructions for proceeding when some members are absent and the agreed-upon process for selling or terminating the limited liability company as a business.

Does my LLC need an operating agreement? 

Some states require you to submit an operating agreement before forming an LLC, while others don't. 

If you don’t create an operating agreement, you’ll follow the default rules for LLC governance set by your state. Before forming your business, you should be fully informed about the state rules you must comply with. 

A formal operating agreement may be more helpful for a multi-member LLC than a single-member LLC, as a single-member LLC won’t have any confusion about splitting up benefits or duties among members.  

What to include in an LLC operating agreement

These are the key areas to address when constructing your LLC operating agreement. 

Member Ownership Percentage 

What percentage of the business does each member own? How will the stocks be divided? Some multi-member LLCs will split everything evenly among members, but that’s not always true. Establish a foundation for your collaboration with an operating agreement that clearly defines each member’s ownership percentage. 

Voting Responsibilities and Voting Rights

Your operating agreement needs to describe how business decisions will be made. What decisions can be made unilaterally, and what decisions must be voted on? For decisions that require a vote, how will the voting happen, and who has the right to make a vote? 

Many LLCs weigh votes according to business ownership, meaning members with a greater share of the company have a more significant share in the decisions. 

Powers and Duties of Managers and Members

Some LLCs will select a manager to oversee operations who is not one of the company’s members, while other LLCs will be run entirely by members. Your operating agreement should clarify this and specify both the authority and the expectations of each manager and member. 

What do each manager and member have the power to do, and what are their responsibilities to the company? Clearly defining each individual’s role and capacity will help your business grow and adapt while sidestepping unproductive issues over authority and decision-making power. 

Profit and Losses Distribution

Once you’ve determined how business operations will be divided, you must define how the resulting profits and losses will be handled. Your operating agreement should include details about how profits and losses will be dispersed to members. 

Profit and loss distribution can be determined based on each member’s ownership percentage, or there can be another system. This also depends on having clear and efficient bookkeeping processes for your business. You should have specific business bank accounts set up to streamline the process for efficient distribution of revenue and expenses.

Meeting Rules

All members should be able to look to the LLC operating agreement for instructions on when and how meetings will be handled. There should be rules regarding who can hold meetings, who will take minutes, and who sets the meeting agenda. 

Not every state requires official member meetings or predesignated rules for those meetings. 

Buyout and Buy-Sell Rules

Operating agreements should contain buyout and buy-sell rules. This will determine what will happen if the LLC is sold or if a member wants to sell or transfer their stake in the LLC. Do you plan on selling your company once it becomes successful? 

Each member’s rights should be clearly outlined. Is any member free to sell off their ownership stake at any point? Including a right of first refusal in this section of the operating agreement may be helpful. 

How to create an operating agreement for an LLC?

Once members have identified and agreed upon critical areas, the operating agreement should be drafted. Once approved, the operating agreement is a legal contract between LLC members, so it's essential to get it right.

Professional services are available that help LLCs create their operating agreement and formation services to make the business official.  

Benefits of having an operating agreement for an LLC

LLCs can be organized in almost limitless ways. This allows you to set rules, which can be hugely beneficial.  

If you’re going to set your own rules, however, there needs to be clarity about what those rules are. The operating agreement is the contract among LLC members establishing the basic rules you will follow. It protects members from personal liability, using default state rules, and should serve as guidelines for an LLC and its members. 

What Happens If You Don't Have an LLC Operating Agreement?

You must submit your operating agreement before you can form your LLC in some states. In the states that do not require an operating agreement to form, you'll have to operate under their default rules.

Creating an LLC operating agreement is a best practice whether it's required in your state or not. With an operating agreement in place, you avoid potential legal issues, sidestep management difficulties, and define how disputes are handled instead of relying on your state.  

LLC Operating Agreement FAQs

Does an LLC operating agreement need to be notarized?

No, an LLC operating agreement is not required to be notarized, but each member is required to sign the agreement for it to be finalized.

Is an operating agreement required for an LLC?

You won't be able to form an LLC without first submitting an operating agreement in states where it is mandatory. Other states do not require an operating agreement for LLCs.  

Is an operating agreement the same as articles of organization?

No, an operating agreement and articles of organization are not the same, but both relate to your LLC. Articles of organization are submitted to the state while forming your LLC; an operating agreement isn't mandatory in every state during the formation process.  

Get Help From the Professionals

An operating agreement is optional in some states, but every LLC should have one. Drafting an agreement can be overwhelming if you're starting out, which is why so many owners and entrepreneurs trust 1-800Accountant, America's leading virtual accounting firm for small businesses, for guidance on their LLC operating agreements. 

Whether it's complimentary business formation, tax advisory, or any of our professional accounting services, we have the solution your LLC needs at a price that works for you. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help your small business.