What is an LLC Operating Agreement?
An LLC operating agreement is a legal document that safeguards your business by detailing the roles and financial responsibilities of members and managers.
We’ll help you answer “What is an LLC operating agreement“ and provide you with free resources to help you create one for your business.
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What’s Inside an Operating Agreement?
There are six main articles of an operating agreement:
- Organizational Structure: This section outlines the initial members or owners of the LLC, their ownership percentages, and how much they initially invested in the company.
- Management and Voting: This details how the LLC will be managed (i.e., member-managed or manager-managed), as well as how voting rights will be determined (e.g., how many votes each member gets, whether votes are decided by a majority or unanimously, etc.).
- Capital Contributions: Describes the amount of money or resources each member has contributed to the LLC and outlines procedures for future capital contributions if required.
- Distributions: Explains how the company's profits and losses will be allocated among the members and how and when members will receive profit distributions.
- Membership Changes: Provides rules for adding or removing members, transferring ownership shares, or what happens in the event of a member's death or incapacity.
- Dissolution: Lays out the process for dissolving the LLC, including who makes the decision, how assets are distributed, and the obligations for final tax returns and legal notifications.
Every business is unique, so LLC operating agreements should be tailored to meet the structure and needs of each limited liability company.
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Northwest will set up your LLC and provide you with an operating agreement for only $29 plus the required state filing fee.
Types of Operating Agreements
An operating agreement outlines operations and legalities for an LLC. Depending on how many members you have and the way your LLC is set up, your operating agreement’s structure will vary.
Single-Member LLCs
Since single-member LLCs only have one member — the owner — their operating agreements are typically simpler than their multi-member counterparts.
However, it’s important when writing your operating agreement to consider what will happen if you choose to add anyone else to your LLC. If you decide to accept new members, you will likely need to draft a new operating agreement.
Multi-Member LLCs
Multi-member LLC operating agreements will likely have more considerations, such as membership interests, voting rights, and how adding or removing members will play out.
Multi-member LLCs can be divided into two main categories: member-managed and manager-managed.
Member-Managed LLCs
As the name suggests, a member-managed LLC is one that’s run by its members, who oversee the daily operations of the LLC. Most LLCs fall into this category.
Manager-Managed LLCs
By contrast, manager-managed LLCs are managed by a third-party manager (or managers) instead of its members.
While a manager-managed LLC operating agreement will be similar to its member-managed counterpart, it should include its manager’s information in Article 2 (management and voting).
Note: If you already have an LLC, here is a free operating agreement template. If you still need to form an LLC, read our top formation services guide.
Is an LLC Operating Agreement Required?
Most states do not legally require LLCs to have their own operating agreements, but they do recognize them as legally binding documents so long as they fall within the parameters of the law.
Determining State Requirements
In the states of Maine, Missouri, and New York, an operating agreement is legally required for LLCs. This is true for single-member LLCs and multi-member LLCs.
For other states, however, it can be difficult to determine what is required according to statute.
For example, while most states do not require an LLC to have an operating agreement, they note that any operating agreement will be legally binding. What’s more, LLCs do not need to file their operating agreements with the state — even ones that require it. In fact, some states even allow operating agreements to be verbal or even just implied.
Regardless of your state’s requirements, it’s good practice to keep a physical, written operating agreement. Without an operating agreement, LLC owners must comply with the state’s default rules. An operating agreement covers a business entity beyond the default rules.
Operating Agreement Requirements by State
Every state has its own laws regarding operating agreements. These statutes may change periodically, so it’s important to know your state's current laws.
You can find your state’s LLC operating agreement statute below to learn more. Note that some states may refer to an operating agreement as a “limited liability company agreement” or just a “company agreement.”
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State Statutes |
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| § 10A-5A-1.08 | ||
How to Get a Free LLC Operating Agreement
You can make your own professionally-designed operating agreement with our free templates.
Simply navigate to our Free LLC Operating Agreement Template page. There, you'll find various templates for different types of LLCs — whether it's manager-managed, member-managed, or single-member.
We also provide a free operating agreement tool in our online Business Center, which will help you create one in minutes by answering a few simple questions.
Changing an LLC Operating Agreement
Just like it can be necessary to modify a business plan, change a registered agent, rework an official contract, or update your Articles of Organization, you may also need to change your official operating agreement in the future.
LLCs may need to change their operating agreement for reasons like:
- Changing the management structure.
- Adapting to new laws or regulations.
- Adding or removing members.
- Modifying profit distribution methods.
- Updating capital contributions or a member’s percentage.
- To safeguard intellectual property.
- To protect limited liability status.
- Avoid personal liability and legal trouble.
- Update member duties and voting rights.
- Business structure adds multiple members.
- Transitions from a sole proprietorship.
Here are straightforward steps to modify your agreement:
- Review: Go through your written operating agreement. Understand what changes are necessary.
- Discuss: For multi-member LLCs, discuss and agree on the changes with all members.
- Vote: If required, vote on the changes as per your existing agreement.
- Document: Write down the changes clearly. The revised agreement must be understandable.
- Sign: All members should sign the updated agreement. It's now legally binding.
- Store: Keep the updated agreement safe, where every member can have access.
- Update: Notify relevant state agencies about significant changes to your LLC structure. This may require updating your articles of organization (or other named state formation documents).
Remember, updating your agreement helps your business stay relevant and grow. Always follow legal protocols during this process.
Post-Operating Agreement Steps
Once you've completed your LLC operating agreement, there are several essential steps to follow to ensure the smooth functioning of your business. Here are the key actions you’ll need to take:
- Secure an EIN for employee hiring and opening business bank accounts.
- Open a business bank account to protect personal assets and maintain a corporate veil.
- Register your LLC for state taxes, which vary by state and business type.
- Implement an accounting system, either self-managed or with a certified public accountant.
- Obtain necessary licenses and permits according to your business nature and local laws.
- Ensure your assets with the right business insurance coverage. (Most businesses need general liability insurance.)
FAQs
An LLC operating agreement is a key legal document outlining the operational procedures and ownership details of a limited liability company (LLC). LLC operating agreements set clear rules and expectations for members, helping to resolve potential disputes and streamline business operations.
It is highly recommended that all LLCs have an operating agreement. There are three states that legally require LLCs to keep an operating agreement: Maine, Missouri, and New York.
Even if you aren’t in one of those states, creating an operating agreement has lots of benefits, and no real downsides, especially since you can have one created for free.
Every member of the LLC and the manager or managers (if there are any) need to sign the operating agreement. Each signatory should sign a separate signature page. Be sure to sign the document in the proper way to best protect your corporate veil. Learn how to properly sign business documents on your state’s LLC formation page.
The operating agreement outlines who owns the LLC and what percentage of ownership each party has. Most of the time, the members of an LLC will own a percentage relative to the contribution they made to the formation of the business, such as cash investments, but you can divide up ownership however you like.
There is no requirement that a manager-managed operating agreement or a member managed operating agreement be notarized. Even without being notarized, the document is still considered legally enforceable among the parties. However, some businesses will still have the signatures notarized to make things “feel” more official. Just be aware that this will add to the operating agreement cost.
You may or may not need an operating agreement to open a bank account. It depends on the bank’s policies and the laws of your state. Since it is relatively easy to create an operating agreement — and even easier when using our free operating agreement tool — you might as well create an operating agreement before trying to open a business bank account.