What Is an LLC Operating Agreement?

Purpose & Legal Framework of Operating Agreements

An LLC operating agreement is an internal governing document that sets out the rules for how a Limited Liability Company (LLC) is owned and operated. It covers who the members (owners) are, what percentage of the LLC each member owns, how profits and losses are shared, how decisions are made, and what happens if a member wants to leave or the company needs to be dissolved.

An operating agreement is separate from the Articles of Organization — the public document you file with the state to legally create the LLC. Articles of Organization typically record the LLC's name, registered agent, and basic formation details. The operating agreement, by contrast, is an internal document that is generally not filed with the state.

An operating agreement is also separate from an EIN (Employer Identification Number), which is a federal tax identification number issued by the IRS. An EIN identifies your business for tax purposes; it is not a governing document.

Single-Member vs. Multi-Member LLCs

The structure of an operating agreement often differs depending on whether the LLC has one owner (a single-member LLC) or multiple owners (a multi-member LLC).

Single-Member LLC: With only one owner, decision-making is straightforward — there is no need to negotiate voting rights or profit sharing between members. However, a written operating agreement is still valuable. It helps establish that the LLC is a legally separate entity from its owner, which can be relevant if a court considers whether to hold the owner personally liable for business debts. Some banks also require an operating agreement to open a business account.

Multi-Member LLC: With multiple owners, a written operating agreement is especially important. It documents each member's ownership percentage, how voting works, how profits are distributed, and what happens if a member wants to sell their interest or leaves the company. Without a clear written agreement, disputes can arise that are difficult and expensive to resolve.

Member-Managed vs. Manager-Managed LLCs

Before drafting an operating agreement, LLC owners need to decide how the company will be managed.

Member-Managed: All members participate in running the day-to-day business and have authority to act on behalf of the company. This is common for smaller LLCs where all owners are actively involved.

Manager-Managed: One or more designated managers — who may or may not themselves be members — handle operations and have authority to bind the company. Other members may take a more passive investment role. This structure can work well for larger LLCs or situations where some investors don't want management responsibility.

The operating agreement should clearly state which management structure the LLC uses and spell out the scope of authority of managing members or managers.

Essential Provisions in an LLC Operating Agreement

While the specific provisions depend on your LLC's circumstances and applicable state law, most operating agreements address:

• LLC name and principal office address — the formal legal name and the primary business address • Members and ownership percentages — who owns what share of the LLC • Capital contributions — what each member contributed (cash, property, or services) to start the business, and whether additional contributions may be required later • Management structure — member-managed or manager-managed, and the scope of authority • Voting rights and decision-making — what decisions require a vote, what percentage of votes is needed, and how votes are cast • Profit, loss, and distribution allocation — how earnings are shared and when distributions can be made • Member withdrawal, death, or incapacity — what happens to a member's interest if they leave, die, or become incapacitated • Transfer of membership interests — whether and how a member can sell or transfer their ownership stake • Admission of new members — the process for bringing in new owners • Recordkeeping and financial accounts — requirements for maintaining books and records • Dispute resolution — how disagreements between members will be handled • Dissolution and winding up — the process for closing the business • Amendment procedures — how the agreement can be changed

Is an LLC Operating Agreement Required by Law?

In the vast majority of U.S. states, adopting an operating agreement is not legally required to form or maintain an LLC. However, statutory approaches differ across jurisdictions, and a few states have specific statutory provisions to note:

• New York (NY LLC Law § 417): New York is one of the few states with an express statutory requirement directing members to adopt a written operating agreement. Section 417 provides that the operating agreement may be adopted before, at the time of, or within 90 days after filing the Articles of Organization. While New York courts have held that failing to adopt an agreement within 90 days does not result in the automatic dissolution of the LLC, the statutory command for a written agreement is explicit.

• Missouri (Mo. Rev. Stat. § 347.081): Missouri statute states that the member or members of an LLC "shall adopt an operating agreement." However, under Mo. Rev. Stat. § 347.015, Missouri law defines an operating agreement as any valid agreement, written or oral. While an oral agreement technically satisfies the statute, proving its terms in court without a written document is exceptionally difficult.

• California (Cal. Corp. Code §§ 17701.02(s), 17701.10): Under California's Revised Uniform Limited Liability Company Act (RULLCA), members are not legally required to execute a written operating agreement. California law recognizes operating agreements whether oral, in a record, or implied. Under § 17701.10(b), to the extent the members do not adopt an agreement covering a specific issue, California statutory default rules automatically govern.

• Delaware (6 Del. C. §§ 18-101(9), 18-201): Delaware law does not require an LLC to have an operating agreement. The Delaware LLC Act provides broad freedom of contract and defines an LLC agreement as written, oral, or implied. If members do not execute an agreement, Delaware's default statutory rules govern the company's internal affairs.

• Maine (31 M.R.S. §§ 1502, 1521): Maine statute does not mandate the execution of a written operating agreement. Like California, Maine law provides that an operating agreement governs to the extent adopted (whether oral, written, or implied), and Maine's statutory default provisions control any matters not addressed by the members.

• All Other States: The remaining states do not require LLCs to adopt an operating agreement. In the absence of an agreement, each state's respective LLC act supplies default statutory rules.

Why a Written Operating Agreement Is Crucial Regardless of State Mandates: Even where state law permits oral or implied agreements or supplies default rules, business advisors and attorneys universally recommend executing a formal written operating agreement for several vital reasons: 1. Overriding State Default Rules: State statutory default rules vary significantly across jurisdictions. Under the Revised Uniform LLC Act (RULLCA) and ULLCA statutes (such as California Cal. Corp. Code § 17704.04, Florida Fla. Stat. § 605.0404, and North Dakota NDCC § 10-32.1-39), statutory defaults mandate equal per-capita voting rights and equal profit distributions among all members regardless of capital contributed. By contrast, under Delaware law (6 Del. C. § 18-503) and New York law (NY LLC Law § 503), defaults allocate profits, losses, and distributions strictly in proportion to capital contributions. In either case, statutory defaults rarely match the real business agreement between partners. An executed written agreement lets you establish custom ownership percentages, sweat-equity arrangements, voting thresholds, and distribution rules. You can customize our standard LLC operating agreement to establish custom voting rules and equity splits. 2. Supporting Limited Liability (The Corporate Veil): For single-member LLCs, an executed operating agreement provides essential documentary evidence that the LLC operates as a distinct legal entity separate from the owner's personal estate. Combined with separate business banking and formal company records, it helps defend against alter-ego claims that seek to pierce the corporate veil (though no contract alone guarantees total immunity from liability). 3. Banking and Financing Due Diligence: Commercial banks, lenders, and title companies routinely request an executed written operating agreement (alongside filed Articles of Organization and IRS EIN confirmation) as part of standard customer due diligence to verify authorized signing authority and entity ownership before opening accounts or extending credit. 4. Preventing and Resolving Member Disputes: A written agreement establishes clear procedures for adding new members, buying out departing members, voting thresholds, and dissolving the company.

*Note: State statutes are subject to legislative amendment. Always consult official legislative codes or a licensed business attorney in your state for legal advice tailored to your LLC.*

How to Create an LLC Operating Agreement

Creating an LLC operating agreement typically involves the following steps:

1. Gather the required information — the LLC's legal name, the names and ownership percentages of all members, and each member's initial capital contribution. 2. Decide on the management structure — determine whether the LLC will be member-managed or manager-managed. 3. Draft the agreement — you can use our free LLC operating agreement template or configure it online with our interactive document generator. The tool guides you through ownership percentages, voting rules, management structure, and dispute resolution. 4. Review the draft carefully — ensure the document accurately reflects the members' agreements and is consistent with your state's LLC statute. 5. Have all members sign — once finalized, all members should sign the agreement. This creates a clear record that everyone agreed to the terms. 6. Keep the agreement on file — store the signed agreement in a safe location. Some states require you to make it available for inspection. Update it whenever your LLC's circumstances change.