An operating agreement defines the organizational structure of your company and sets up a chain of command. Although not every state requires one, it protects your interests when starting your business—even if you're forming a single-member LLC.
In this guide, you'll learn what to include in an operating agreement to protect your business and personal assets and how to file and maintain one.
What Is an Operating Agreement?
The purpose of an operating agreement is to define rules and guidelines for a business. As the business owner, your personal liability might increase without the structure laid out in an operating agreement. Even if your state doesn't require one, it might be wise to consider drafting an agreement to protect your interests.
For example, if your LLC has multiple members who each contributed different amounts when forming the business, you might want to stipulate a profit split reflecting those contributions. Without an operating agreement, your business is governed by the rules in your state, meaning you could be subject to an even split of all profits.
What an Operating Agreement Should Include
An operating agreement should outline voting rights, member responsibilities, and even meeting frequency. While many states do not require any particulars, it's wise to make an agreement that's specific to your needs.
These 13 items can help you clearly explain each part of your business and prove its legitimacy, although your operating agreement will depend on the size of your LLC, your expansion plans, and more.
1. Name and Address of Your LLC
Include the legal name of the LLC and its registered address. Depending on your state, you might need to add the words “Limited Liability Company" or “LLC" to your company's official name. Most states require that your company's address must:
- Be able to receive mail
- Be permanent and not a P.O. box
2. LLC Articles of Organization
File articles of organization with the secretary of state in the state where your business is based. Include this document in your operating agreement to:
- Verify the business's legitimacy
- Prove the founding date
3. Purpose of Your LLC
This is the intention of your company. What does your business hope to accomplish? You'll answer this question when writing your business purpose. A purpose statement usually includes:
- An overview of what the business does
- The state where the business operates
Once you file articles of organization with the secretary of state, you can move ahead with writing your operating agreement. The filing fee for the articles ranges from less than $100 to more than $500, depending on your state.
2. Write the Operating Agreement
Follow the 13 steps above to craft an operating agreement that addresses your LLC's exact needs. Once you've completed the operating agreement, you'll need to ensure member consensus.
3. Sign the Document
Each member should sign the agreement to indicate the validity and help your operating agreement's credibility if it is ever questioned.
4. File the operating agreement securely
When filing your operating agreement, make copies and distribute them to any members. Nonmembers are not required to see the operating agreement.
Operating Agreement FAQs
Don't get hung up on these common questions about LLC operating agreements.
1. Is an Operating Agreement Required?
Not in every state. Five states require that LLCs operating agreements: California, Delaware, Missouri, New York, and Maine. Still, it's a good idea to maintain an operating agreement within your own files, regardless of which state you live in.
2. Is an LLC Agreement the Same as an Operating Agreement?
An LLC agreement could refer to an operating agreement or to articles of organization—LLC agreement is not a generally known entity.
3. What Does an Operating Agreement Cost?
Operating agreements do not cost money, since no state requires you to file an official copy. Instead, it's recommended that you hire a lawyer to help you craft this complex and crucial legal document. Depending on who you hire, the price of an operating agreement varies.
4. Can You Amend an Operating Agreement?
Operating agreements can be amended, but the agreement itself might dictate how that amendment can come into effect. Amendments need member approval and subsequent documentation to make sure they're enforced. An operating agreement might require a certain majority of votes to pass an amendment.