Operating Agreement: What It Is, What It Covers, and Do You Need One?

What Is an Operating Agreement?

An operating agreement is a document that establishes the rules and procedures for how an LLC will be owned and operated.

It can explain things such as:

• Who owns the LLC
• How ownership is divided
• How the business is managed
• How decisions are made
• How profits and losses are handled
• What happens when an owner leaves
• How new owners can be admitted
• What happens if the business needs to be dissolved

An operating agreement is especially important when an LLC has multiple owners because it can establish how the owners will work together and what happens when circumstances change.

But even a single-member LLC can benefit from having an operating agreement.

Is an Operating Agreement Required?

This is one of the most common questions about operating agreements.

The answer is:

It depends on the state.

Some states require certain LLCs to have an operating agreement, while others don't require one to be filed with the state.

Even when an operating agreement isn't legally required, having one can still be valuable.

The important distinction is between:

Required by law

and:

Recommended for your business.

Those aren't always the same thing.

An operating agreement is generally an internal business document. You typically don't file it with the state as part of the LLC formation process.

If you're still forming your LLC, see:

→ How to Form an LLC

Why Does an LLC Need an Operating Agreement?

An LLC can exist without its owners writing down every rule governing the company.

When the owners don't establish their own rules, however, state law can provide default rules governing certain aspects of the LLC.

An operating agreement allows the owners to establish their own framework where the law permits them to do so.

Think of it as the rulebook for the LLC.

It can answer questions before they become disputes.

For example:

• Who makes major business decisions?
• Does every owner have an equal vote?
• How are profits distributed?
• What happens if one owner wants to leave?
• Can an owner sell their interest?
• What happens if an owner dies?
• Can the company admit a new member?
• Who manages the company's day-to-day operations?

Without a written agreement, these questions can become much more complicated.

What Should an Operating Agreement Include?

There isn't one universal operating agreement that works for every LLC.

The document should reflect the company's structure and the owners' actual agreement.

However, many operating agreements address several common areas.

1. Ownership

The agreement should identify the LLC's owners, often called members.

For a multi-member LLC, it can specify each owner's percentage or ownership interest.

For example:

• Member A — 60%
• Member B — 40%

Ownership percentages are important because they can affect voting, distributions, and other aspects of the business.

2. Management Structure

An operating agreement can explain how the LLC will be managed.

An LLC may generally be structured as:

Member-managed

or:

Manager-managed

In a member-managed LLC, the members generally participate in managing the business.

In a manager-managed LLC, the members designate one or more managers to handle management responsibilities.

The appropriate structure depends on the business.

3. Voting and Decision-Making

The agreement can establish how important decisions are made.

For example, it may address:

• Ordinary business decisions
• Major purchases
• Borrowing money
• Selling significant assets
• Adding members
• Changing ownership
• Amending the operating agreement
• Dissolving the company

The agreement can establish whether decisions require:

• A simple majority
• A specific percentage
• Unanimous approval
• Another agreed voting threshold

The rules should be clear before a major disagreement occurs.

4. Profits and Losses

An operating agreement can explain how profits and losses are allocated among members.

For example, a business with two owners may agree to divide profits equally.

Another company may have ownership percentages that result in a different allocation.

The agreement should reflect the actual arrangement between the owners and be consistent with applicable tax rules.

5. Distributions

Profits and distributions aren't necessarily the same thing.

An operating agreement can establish rules around when and how money can be distributed to members.

This can help prevent disagreements over when owners can take money out of the company.

6. Member Responsibilities

The agreement can describe the responsibilities of the LLC's members.

This can be particularly important in a multi-member business.

For example:

• One member handles sales
• Another handles operations
• Another manages finances

The agreement can establish expectations around management and decision-making.

7. Adding New Members

What happens if the company wants to bring in another owner?

The operating agreement can establish the process.

It may address:

• Required approval
• Ownership percentages
• Contributions
• Voting rights
• Buy-in requirements
• Changes to existing ownership

Having a process in place can make future changes easier to manage.

8. Transferring Ownership

An owner may eventually want to sell or transfer their interest in the LLC.

An operating agreement can establish restrictions and procedures for doing so.

For example, the agreement may give existing members certain rights before an ownership interest can be transferred to an outside party.

This becomes particularly important for businesses with multiple owners.

9. What Happens When an Owner Leaves?

Businesses change.

An owner may:

• Retire
• Leave the company
• Become unable to participate
• Sell their interest
• Die

A well-designed operating agreement can establish what happens to that owner's interest.

This can prevent the remaining owners from having to figure out the rules during an already difficult situation.

10. Dissolving the LLC

An operating agreement can also address what happens if the owners decide to close the business.

It may establish:

• Who can approve dissolution
• How assets are handled
• How debts are paid
• How remaining assets are distributed
• What happens to company records

Single-Member LLC Operating Agreement

You might assume an operating agreement isn't necessary if you're the only owner.

That's not necessarily the best approach.

A single-member LLC operating agreement can document that the business is intended to operate as an LLC and establish how the company is structured and managed.

It can also help keep your business records organized.

A single-member agreement may address:

• The LLC's legal name
• The owner
• Management
• Business purpose
• Capital contributions
• Distributions
• Tax treatment
• Recordkeeping
• Dissolution

State requirements and the appropriate contents can vary.

Multi-Member LLC Operating Agreement

Operating agreements become particularly important when an LLC has multiple members.

Two or more business owners may have very different assumptions about how the company should operate.

For example:

"I thought we both had to approve major purchases."

versus:

"I thought I could make that decision myself."

An operating agreement gives the owners an opportunity to establish the rules before disagreements arise.

For a multi-member LLC, the agreement should clearly address ownership, voting, management, distributions, responsibilities, transfers, and exit scenarios.

Operating Agreement vs. Articles of Organization

These documents serve different purposes.

Articles of Organization

The Articles of Organization, or a similarly named formation document, are generally filed with the state to create the LLC.

They provide the state with information required to establish the entity.

Operating Agreement

The operating agreement is generally an internal document that establishes how the LLC will operate.

Think of it this way:

Articles of Organization = create the LLC

Operating Agreement = establish the rules for running the LLC

The exact terminology and requirements vary by state.

Do You File an Operating Agreement With the State?

Generally, an operating agreement is an internal LLC document and isn't filed with the state in the same way as the LLC's formation document.

You should keep the agreement with your company's important records.

Banks, investors, attorneys, accountants, or other parties may sometimes request a copy.

The specific rules can vary by jurisdiction.

Does an Operating Agreement Need to Be Notarized?

Not necessarily.

Whether notarization is required depends on the circumstances and applicable state law.

Many operating agreements can be signed by the members without notarization.

However, if you're using an operating agreement for a specific legal, financial, or transactional purpose, additional requirements may apply.

Can You Change an Operating Agreement?

Yes.

An LLC's circumstances can change over time.

For example:

• A new member joins
• An owner leaves
• Ownership percentages change
• Management responsibilities change
• The business expands
• The members agree to new rules

Your operating agreement should be updated when appropriate so that it reflects the actual agreement between the owners.

Don't let the document describe a business that no longer exists.

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

If your state doesn't require an operating agreement, your LLC may still legally exist without one.

However, failing to establish your own rules can create uncertainty.

State law may provide default rules for certain aspects of your LLC.

That can become especially important when multiple owners disagree about how the company should operate.

An operating agreement gives the members an opportunity to clearly document their intentions.

Does an Operating Agreement Protect My LLC?

An operating agreement itself isn't what creates limited liability protection.

The LLC's legal structure is what provides the framework for limited liability protection, subject to applicable law and the circumstances of the business.

However, maintaining proper business records—including an operating agreement—can help demonstrate that the LLC is being operated as a separate business entity.

That makes an operating agreement an important part of good business recordkeeping.

Operating Agreement and Business Compliance

There's an important distinction between forming your LLC and maintaining your LLC.

Creating an operating agreement is part of organizing the company.

But it doesn't eliminate the ongoing requirements that may apply to the business.

Depending on your business and location, you may need to track:

• Annual reports
• State filings
• Business licenses
• Permits
• Tax registrations
• Registered-agent requirements
• DBA renewals
• Other government filings
• Local requirements

Some requirements happen once.

Others repeat every year.

Others may be triggered by a specific event.

Start Tracking Your Business Compliance →

Startup to Corporate helps business owners organize their registrations, licenses, filings, renewals, and other business requirements so they can see what needs to be handled and when.

Operating Agreement Checklist

If you own an LLC, consider whether your operating agreement addresses:

• LLC legal name
• Members and ownership percentages
• Management structure
• Voting rights
• Decision-making procedures
• Member responsibilities
• Capital contributions
• Profit and loss allocations
• Distributions
• Adding new members
• Transferring ownership
• What happens when a member leaves
• Death or incapacity of a member
• Dissolution
• Procedures for amending the agreement
• Applicable state-specific provisions

For a multi-member LLC, the more clearly these issues are addressed, the fewer assumptions the owners have to make later.

Common Operating Agreement Mistakes

Mistake #1: Never creating one

Even when an operating agreement isn't legally required, it can still be useful.

Mistake #2: Using a generic document without reviewing it

An operating agreement should reflect how your business actually operates.

Mistake #3: Not updating it

If ownership or management changes, the agreement may need to change too.

Mistake #4: Leaving important decisions undefined

Ownership percentages and day-to-day management are only part of the picture.

Consider what happens when an owner wants to leave, sell their interest, or bring in another member.

Mistake #5: Assuming the operating agreement handles compliance

It doesn't.

An operating agreement establishes internal business rules. It doesn't automatically complete government filings, license renewals, tax registrations, or other compliance obligations.

The Bottom Line

An operating agreement is essentially the rulebook for your LLC.

It can establish:

• Who owns the company
• Who manages it
• How decisions are made
• How money is distributed
• What happens when ownership changes
• How the business can be dissolved

Not every LLC is legally required to have one, and the rules vary by state.

But for many businesses—particularly LLCs with multiple owners—having a clear, current operating agreement can prevent confusion and help establish how the company is supposed to operate.

And remember:

Creating your LLC is only the beginning. Maintaining it is an ongoing responsibility.

Get Your Business Organized →

Startup to Corporate helps business owners keep track of the registrations, licenses, filings, deadlines, renewals, and other compliance requirements that come with running a business.

Know what your business needs. Know when it needs to be done.