LLC Operating Agreement: What’s Included and How to Write One

When starting a new business, every entrepreneur wants to focus on their customers and providing the best product or service. But there are some legal matters that you need to take care of first to protect your business now and in the future. If your business entity is structured as a limited liability company (LLC), then you’ll need to create an LLC operating agreement.

An operating agreement provides a blueprint for running your business and lays out the rights and duties of each owner. Most states don’t require an operating agreement, but having one can help you stay focused when business gets tough and avoid conflicts with your business partners.

In this guide, therefore, we’ll cover why it’s important to have an LLC operating agreement, what to include in your agreement, and how to create one.

Statement of Intent

This statement specifies that the operating agreement conforms to the LLC laws of your state and that after all of the proper documents have been filed, then the business will come into existence.

  • Liability statement: This language specifies that the LLC members have limited liability protection as members.
  • Death of a member: This provision would detail the procedure that takes place in the event that a member passes away.
  • Dispute resolution: What happens if there’s a dispute amongst members? This provision would outline the process to follow.
  • Communication: How are important notices about the business communicated? This provision details how information is transmitted amongst the members.
  • State law: This provision simply identifies the state law that governs the LLC.
  • Special agreements: Some LLCs may wish to include non-compete agreements, conflict of interest policies, and other specialized agreements as part of their operating agreement.

Is an LLC Operating Agreement Required?

Before you get too involved in this process, you might be wondering whether you’re required to have an LLC operating agreement—especially if you’re a single-member LLC.

In short, the answer is that it depends.

As you’re may already know, in order to establish a limited liability company, you have to file articles of organization with the state. The articles contain basic information about your business and make it legal for you to operate in the state.

However, there are additional compliance requirements, and depending on which state your business is located in, one of these might be the creation of an LLC operating agreement.

Five states—California, Delaware, Maine, Missouri, and New York—require LLCs to have operating agreements before the owners can sell any products or services. In these states, the agreement can be written or oral (in a few, it can even be implied by the behavior of the LLC members). Most don’t give too much guidance on what should be included in the agreement.

This being said, however, we strongly recommend a written LLC operating agreement. A written agreement is the best way to document the business owners’ agreements and prevent misunderstandings down the line.

Even if your business isn’t located in one of these five states, it can be vital to your business’s success to have a written LLC operating agreement. We’ll explain why in the next section.

Benefits of Having an LLC Operating Agreement

When it comes down to it, an LLC operating agreement is similar to a founders’ agreement. The agreement contains information that the members think is helpful to clarify now so that the business runs smoothly later on. But there’s more to it than that. The existence of the agreement also helps to cement the company’s status as a limited liability company.  

Deborah Sweeney, CEO of MyCorporation, says,

“Our company has an LLC operating agreement, and I believe it is extremely important in setting for our business ownership, roles, and structure. We leverage this document for use as a basis from which we update and make changes each year. The operating agreement can serve the purpose of setting forth how the business is run, cash distributed, roles maintained, and ultimately, how the business assets may be transferred or sold.”

Here’s more on the benefits of having an LLC operating agreement:

Protect Your LLC Status

In order to preserve your LLC’s limited liability,  you should document as many of your LLC’s processes as possible.

This being said, it’s particularly important for a single-member LLC to show that the business is a separate legal entity from the owner. This helps ensure that legal claimants and creditors can only come after your company’s assets, not your personal assets.

Customize the Division of Business Profits

In an S-corp or C-corp, the shareholders’ division of profits must match their ownership shares, but the LLC operating agreement gives you more flexibility to choose the rights of each owner.

For example, let’s say Owner A contributes 70% of the money to the LLC, but does only 30% of the work. Let’s say Owner B contributes only 30% of the money, but does 70% of the work. You can set up your LLC operating agreement to give each owner a 50/50 split of the profits since they’re each bringing something different to the table.

Prevent Conflicts Among Owners

As we’ve discussed, an LLC operating agreement contains clear provisions about each owner’s contributions to the business, their share of profits, and their responsibilities to the company and other members. That means the agreement is a good dispute resolution tool.

For instance, if marketing matters are entrusted to one member in the operating agreement, then that member gets the final say if any disagreement arises about a marketing strategy.

Customize Your Governing Rules

In the absence of an LLC operating agreement, your state’s default rules will kick in. Every state has adopted default rules on LLC management, admitting new members, dissolution, and other aspects of LLC governance.

You might not agree with how your state has addressed each of these issues, but you need an LLC operating agreement to override your state’s rules.

Clarify the business’s future  

In most cases, entrepreneurs want their business to continue after they retire or pass away. An LLC operating agreement clearly specifies who will take over your business, and on what terms, if you can no longer be at the helm.

This can prevent inter-family squabbling and lengthy legal battles.

The Bottom Line

At the end of the day, an LLC operating agreement sets the ground rules for your business for all owners to see.

It’s the single best way to launch your LLC on solid footing and prevent disagreements among owners. An operating agreement also has the advantage of preserving each owner’s limited liability status—which can be important whether you have several members or a single-member LLC.

Although creating an LLC operating agreement with a lawyer’s help is the most careful route, online legal services like LegalZoom can help you put your agreement together quickly and easily.

Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera, specializing in small business finance, credit, law, and insurance. She has a law degree from the University of Washington and a bachelor's degree from U.C. Berkeley in communications and political science. Priyanka's work has been featured in Inc., Fast Company, CNBC, and other top publications. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup. Email: priyanka@fundera.com.
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