What is an LLC Operating Agreement?
An LLC Operating Agreement is a legal document that outlines the ownership structure, management rules, and operating procedures of a Limited Liability Company. While not required in most states, it's one of the most important documents your LLC can have.
Why You Need One (Even for Single-Member LLCs)
Without an operating agreement, your LLC is governed by your state's default rules — which may not align with your intentions. An operating agreement lets you customize how your business operates.
For single-member LLCs, an operating agreement helps maintain the liability protection that separates your personal assets from business debts.
Key Sections of an LLC Operating Agreement
1. Formation Information
Basic details: LLC name, state of formation, registered agent, principal office address, and effective date.
2. Members and Ownership
List all members and their ownership percentages (must total 100%). Include initial capital contributions from each member.
3. Management Structure
Member-managed: All members participate in running the business. Best for small LLCs where all owners are active.
Manager-managed: Designated managers (who may or may not be members) run the business. Best when some members are passive investors.
4. Voting Rights
How are decisions made? Common structures include voting proportional to ownership percentage, or one vote per member regardless of ownership.
5. Profit and Loss Allocation
How are profits and losses distributed? Options include pro-rata (based on ownership %), equal distribution, or a custom arrangement.
6. Transfer Restrictions
Can members sell or transfer their ownership interest? Most operating agreements include right of first refusal provisions.
7. Dissolution
Under what circumstances can the LLC be dissolved? What happens to assets upon dissolution?
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