LLC Operating Agreements: Why Owners Sign One

A limited liability company, or LLC, is one of the most common ways to set up a small business. Forming one usually starts with a filing with the state. But the state filing says very little about how the owners will actually run the business together. That is the job of the operating agreement. This guide explains what an operating agreement is, what it usually covers, and why owners sign one even when their state does not require it.

What an LLC is, in brief

The USAGov page on starting a business points business owners to the Small Business Administration (SBA) guide for planning, launching, and managing a business. The SBA's guide to choosing a business structure explains that an LLC combines features of corporations and partnerships. According to the SBA, an LLC protects owners from personal liability in most instances, and profits and losses can pass through to the owners' personal income. The SBA also notes that owners of an LLC, called members, are considered self-employed for tax purposes.

The SBA adds a point that connects directly to operating agreements: in many states, LLCs can have a limited life, and when a member joins or leaves, some states may require the LLC to be dissolved and re-formed, unless there is already an agreement in place for buying, selling, and transferring ownership.

Formation documents vs. the operating agreement

The SBA's page on registering a business describes two different documents for an LLC:

• Articles of organization — a simple document filed with the state describing the basics, such as the company name, address, member names, and registered agent.
• LLC operating agreement — an internal document describing how the company makes financial and functional decisions. The SBA says it defines how key business decisions are made, as well as each member's duties, powers, and responsibilities.

The SBA states that it is widely recommended to create an operating agreement to protect yourself and your business, even if your state does not require one. The documents you need, and what goes in them, vary by state.

What an operating agreement commonly covers

Every agreement is different, but many address questions like these:

• Ownership. Who the members are and what share each one holds.
• Contributions. What each member puts in, such as money, property, or work, and whether more can be required later.
• Profits and losses. How they are shared and when money is paid out.
• Management. Whether all members manage the business together or managers are appointed, and who can sign contracts or open accounts.
• Voting. Which decisions need a simple majority, which need everyone's agreement, and how ties are broken.
• Duties. What each member is expected to do and whether members can run competing businesses.
• Adding and removing members. How new owners join, and what happens if someone wants to leave.
• Transfers and buyouts. Whether a member can sell their share, whether others get the first chance to buy, and how the price is set.
• Death, disability, or divorce. What happens to a member's interest in these events.
• Disputes. Whether disagreements go to mediation, arbitration, or court.
• Dissolution. How the business is wound down and how remaining assets are divided.

Why owners sign one

It replaces default rules with your own. Each state has default rules that apply to LLCs when the owners have not agreed otherwise. Those defaults may not match what the owners actually intended.

It reduces future arguments. Owners who agree when everyone gets along have a written reference when they disagree later.

It plans for change. As the SBA notes, ownership changes can create problems if no agreement covers them.

It helps show the LLC is separate from its owners. Keeping the company's business and records separate from personal affairs is part of running an LLC. An operating agreement is one piece of that record.

Single-member LLCs benefit too. Even with one owner, an agreement can set out how the business is managed and what happens if the owner dies or becomes unable to run it.

Templates vs. a lawyer's review

Templates are widely available, and some owners start with one. The risk is that a template may not fit your state's rules or your actual deal, especially on money, buyouts, and decision-making. A business lawyer can draft or review the agreement, explain your state's default rules, and point out gaps. Our business law practice page describes the kinds of matters business lawyers often handle.

The SBA also offers free or low-cost counseling through its network of partners, which the USAGov start-business page links to.

Frequently asked questions

Does my state require an LLC operating agreement?

Requirements vary by state. The SBA notes that creating one is widely recommended even where it is not required.

Is the operating agreement filed with the state?

Generally, the articles of organization are filed with the state, while the operating agreement is an internal document kept by the company. Check your state's rules.

Can we change the operating agreement later?

Usually, yes, following whatever amendment process the agreement sets out. That is one more reason to include clear amendment rules.

Do single-member LLCs need one?

They are not always required to have one, but many owners sign one anyway to document how the business runs and what happens if the owner can no longer manage it.

Related: Browse guides on legal topics.

This page is general information, not legal advice. Laws change and every case is different — talk to a licensed attorney about your situation.