Operating Agreement

An LLC operating agreement governs how the business is owned, managed, and operated, covering everything from member ownership percentages to profit distribution and decision-making authority. Without one, state default rules apply automatically.

An operating agreement is an internal document, meaning it is not filed with the state. It exists between the LLC's members and serves as the governing framework for the business. Both single-member and multi-member LLCs can, and generally should, have one.

Five states currently require LLCs to have an operating agreement: California, New York, Missouri, Maine, and Delaware. In all other states, the document is optional but widely recommended by legal and business professionals.

How an operating agreement works

An operating agreement is drafted at or shortly after the time of LLC formation. It is signed by all members and kept on file internally, typically with the LLC's other formation documents. No state filing is required, and there are no associated state fees.

The document functions as a private contract among the LLC's members. It supersedes state default rules in most jurisdictions, giving members the ability to customize how the business operates rather than being bound by generic statutory provisions.

A typical operating agreement addresses the following:

• Ownership structure. Each member's percentage interest in the LLC
• Management structure. Whether the LLC is member-managed or manager-managed
• Capital contributions. What each member has invested or agreed to contribute
• Profit and loss allocation. How earnings and losses are distributed among members
• Voting rights. How decisions are made and what constitutes a quorum in operating agreements
• Transfer of membership interests. Rules for adding or removing members
• Dissolution procedures. How the LLC will be wound down if necessary

Once signed, the agreement can be amended, but typically requires the consent of all or a majority of members, depending on what the document itself specifies.

Why an operating agreement matters

Without an operating agreement, an LLC is governed by the default statutes of the state in which it was formed. Those default rules may not reflect the actual intentions of the members, and in a multi-member LLC, that gap can lead to disputes.

An operating agreement also helps establish the LLC as a distinct legal entity, separate from its owners. This separation is foundational to maintaining limited liability protection. If a business appears to operate informally, without documented rules or structure, courts may be more willing to "pierce the corporate veil," exposing members to personal liability.

Banks, lenders, and investors frequently request a copy of the operating agreement before extending credit or entering into a business relationship. The document serves as evidence of ownership and authority, confirming who has the right to act on behalf of the LLC.

Common uses and examples of an operating agreement

Operating agreements apply across a wide range of business scenarios. The following examples illustrate how the document functions in practice.

• Two co-founders launching a consulting firm. A 50/50 LLC requires clear rules about how decisions are made when members disagree. The operating agreement can specify a tiebreaker mechanism or require unanimous consent for major decisions.
• A sole owner forming a single-member LLC. Even with no co-owners, a single-member operating agreement documents the owner's limited liability status, management responsibilities, and procedures for dissolution, particularly important given that small LLCs are most likely to have their veils pierced.
• A managing member delegating authority. In a manager-managed LLC, the operating agreement defines the scope of the manager's authority, including what decisions they can make independently and which require member approval.
• Adding a new member to an existing LLC. Some states may require the LLC to be dissolved and re-formed without such provisions. The operating agreement establishes the process for admitting new members, including how ownership percentages are recalculated and what capital contributions are required.

Key characteristics of an operating agreement

• It's customizable. Unlike articles of organization, which follow a standard state-mandated format, an operating agreement can be tailored to the specific needs and arrangements of the LLC's members.
• It's private. The document is not part of the public record. Members can include sensitive financial arrangements, profit-sharing structures, or management terms without those details being publicly accessible.
• It's enforceable. A properly executed operating agreement is a binding contract. Courts generally uphold its terms when disputes arise between members, provided the terms do not violate applicable law.
• It applies to all LLC types. Whether the entity is a domestic LLC, a professional llc, or a series LLC, an operating agreement can be drafted to address the specific governance needs of that structure.

Operating agreement vs. articles of organization

These two documents are frequently confused but serve entirely different purposes. Articles of organization are the formation documents filed with the state to officially create the LLC. They are mandatory, public, and subject to state fees that range from $35 to $500. An operating agreement, by contrast, is an internal document that governs how the LLC operates after formation. Filing articles of organization does not create an operating agreement, and having an operating agreement does not substitute for articles of organization.

Considerations and best practices

An operating agreement should be drafted at the time of LLC formation, not after disputes arise. Retroactive drafting is possible but more complicated and less reliable as evidence of original intent.

State-specific language matters. Default rules vary significantly by state, so an operating agreement that works well in one jurisdiction may leave gaps in another. Use a document that reflects the laws of the state where the LLC is formed to help ensure the agreement functions as intended.

The document should be reviewed and updated when significant changes occur, such as the addition or departure of a member, a change in management structure, or a shift in profit-sharing arrangements. An outdated operating agreement can create as many problems as having none at all.

Related terms and next steps

Understanding an LLC operating agreement is closely tied to understanding the broader structure of an LLC. The following related terms provide useful context.

• Single-member LLCs are LLCs with only one owner. Operating agreements for these entities address sole ownership and management.
• Multi-member LLCs are LLCs with two or more members. Operating agreements are especially critical for defining member rights and responsibilities.
• A managing member in an LLC is the member or manager designated to run day-to-day operations, as defined in the operating agreement.
• A quorum in operating agreements is the minimum number of members required to conduct official business or vote on decisions.

LegalZoom provides state-specific operating agreement preparation for both new and existing LLCs, based on the specific structure and needs of the business.

FAQs about LLC operating agreements

Can a single member write their own LLC operating agreement, or does it need to be drafted by an attorney?

A single member can draft their own operating agreement, no attorney is legally required, but a self-drafted document that omits state-specific provisions or uses generic language may fail to override default rules or hold up if the LLC's liability protection is ever challenged in court. For straightforward single-member structures, a professionally prepared template tailored to the formation state is often sufficient.

What happens to an LLC that operates without an operating agreement?

The LLC becomes subject to the default statutes of its formation state, which govern everything from how profits are divided to what vote is required to admit a new member, and those defaults may distribute authority or economics in ways the members never intended. In states like California, New York, and Delaware, operating without one also means the LLC is out of compliance with a legal requirement, which creates additional exposure.

How does an operating agreement get amended after it has been signed?

The amendment process is governed by the operating agreement itself, as most documents specify whether changes require a majority vote, a supermajority, or unanimous consent from all members. Once the required approval is obtained, the amendment is drafted as a formal written document, signed by the necessary members, and stored alongside the original agreement; no state filing is required unless the change also affects the articles of organization.

Does an operating agreement affect how the LLC is taxed?

The profit and loss allocation provisions in an operating agreement directly determine how taxable income is distributed among members, which can differ from ownership percentages if the members have structured the agreement that way. For multi-member LLCs taxed as partnerships, the IRS requires that those allocations have "substantial economic effect," meaning they must reflect genuine economic arrangements, not just tax-motivated distributions, so poorly drafted allocation language can invite IRS scrutiny and potential penalties.

Is an operating agreement the same thing as bylaws?

Not technically. They serve parallel governance functions but apply to different entity types: Bylaws govern corporations, while operating agreements govern LLCs. The substantive difference is that bylaws are typically required by state law and follow a more standardized structure, whereas an operating agreement offers significantly more flexibility to customize ownership, management, and financial arrangements to fit the specific needs of the LLC's members.

When should an existing operating agreement be updated?

An operating agreement should be reviewed and amended any time a structural change occurs, such as a member joining or leaving, a shift from member-managed to manager-managed, a change in profit-sharing percentages, or a significant capital event. An agreement that no longer reflects how the business actually operates is not just outdated; it can actively work against the members by locking in terms that no longer apply or leaving critical new arrangements undocumented.