An operating agreement is the internal contract among an LLC's members. It is generally not filed with the state, and only a handful of states require one at all — which is exactly why it gets skipped, and why skipping it is a mistake.
What happens without one
Your state's default LLC statute fills the gap. Those defaults are written to be administrable, not to suit your business, and they routinely produce outcomes owners did not intend — profits split by a rule you would not have chosen, voting thresholds that let one member block everything, or no mechanism at all for buying out a departing owner.
It looks pointless to write an agreement with yourself, but it does real work: it evidences that the LLC is a genuine separate entity rather than an alter ego, which matters if anyone ever argues to disregard it. Banks and investors ask for it. And it sets out succession if you die or are incapacitated — without which your LLC interest is resolved by default rules that may not match your intentions.
What goes in
The basics
- Entity name, formation state and principal address.
- Purpose, usually drafted broadly so it does not constrain you later.
- Members, their contributions, and ownership percentages.
- Whether it is member-managed or manager-managed.
Money
- Capital contributions — what each member put in, and whether more can be required later.
- Profit and loss allocation — usually by ownership percentage, but it does not have to be.
- Distributions — when profit is actually paid out, and who decides.
- Tax distributions — a provision requiring the LLC to distribute enough for members to pay tax on income allocated to them. Without it, a member can owe tax on profit they never received.
Decisions
- What ordinary decisions the managers can take alone.
- Which major decisions need a supermajority or unanimity — taking on debt, selling assets, admitting a member, changing the agreement.
- How voting works: by percentage or per capita.
- A deadlock mechanism for 50/50 ownership, which is where agreements most often fail.
Changes in ownership
The section that earns the document's keep. It should cover what happens when a member wants out, dies, becomes disabled, divorces, goes bankrupt, or simply stops contributing.
| Clause | What it does |
|---|---|
| Transfer restrictions | Stops a member selling their stake to someone the others do not want as a partner |
| Right of first refusal | Existing members get first chance to buy a departing member's interest |
| Buy-sell provisions | Triggers a purchase on death, disability, withdrawal or expulsion |
| Valuation method | How the price is set — a formula, an appraisal process, or a periodically agreed figure |
| Payment terms | Whether a buyout is payable in instalments, so it does not sink the business |
| Drag-along / tag-along | Governs what happens if a majority wants to sell the whole business |
A buy-sell with no valuation method is a dispute waiting to happen — the departing member wants a high number, those remaining want a low one, and there is nothing to point at. Agreeing a method while everyone is still on good terms is far easier than agreeing a price once they are not.
Housekeeping
- Records and accounting: what is kept and what members may inspect.
- Fiscal year and tax elections.
- Dissolution: how the LLC is wound up and assets distributed.
- Amendment: what it takes to change the agreement.
- Dispute resolution and governing law.
Practical points
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Templates are a starting point, not an output
A generic template covers the basics and usually handles ownership transitions badly — exactly the part that matters. Use one to get a first draft, then work through the transition clauses properly.
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Get it signed and stored
Signed by every member, with a copy each, kept with your formation documents. An unsigned draft on someone's laptop is not an agreement.
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Update it when reality changes
New member, changed percentages, a different management structure — amend the agreement rather than relying on an understanding. Stale agreements cause their own arguments.
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Keep it consistent with your filings
If the agreement says manager-managed and the articles say member-managed, you have created ambiguity for no reason.
Questions owners ask
Do I have to file it with the state?
Generally no. It is an internal document. That is also why it can contain commercially sensitive terms without them becoming public.
Can we write it ourselves?
For a single-member LLC, often yes. With multiple owners it is worth a lawyer, mostly for the buy-sell and deadlock provisions — the cost is small against what a poorly handled split costs.
What if we have been operating without one?
Write one now. It is far easier while everyone agrees. Adopting an agreement retrospectively is normal and simply requires all current members to sign.
Where to check
- Your state's LLC act — the defaults that apply where your agreement is silent
- SBA — choose a business structure
- A business attorney in your state, for multi-member agreements