LLC operating agreement

What an LLC operating agreement is

An LLC operating agreement is a written contract among the owners of a limited liability company, called members, that governs how the company runs. It covers ownership percentages, how money is split, how decisions are made, and how members can join or leave. While the articles of organization create the LLC with the state, the operating agreement is the internal document that says how it actually works.

Many states do not require an operating agreement to be filed, and some do not require one at all, but having one is still important. Without it, the company defaults to the state's standard LLC rules, which may not match what the owners intended. A single member LLC benefits too, because the agreement helps show the business is separate from the owner, which supports the liability protection the LLC is meant to provide.

This is general information, not legal or tax advice. Rules vary by state and province, and the right choice depends on your facts. For anything important, check with a qualified professional.

Why an LLC needs an operating agreement

• It sets the rules you choose. Instead of relying on default state law, you decide how profits, voting, and management work.
• It prevents disputes. Clear terms on money and decisions reduce arguments among members later.
• It supports liability protection. A signed agreement helps show the LLC is a real, separate entity, which matters if the protection is ever challenged.
• Banks and investors ask for it. Many banks want to see an operating agreement to open a business account, and outside parties often request it.

What to include in an operating agreement

• Company basics. The LLC name, principal address, purpose, and formation date.
• Members and ownership. Each member's name and ownership percentage, often called a membership interest.
• Capital contributions. What each member put in, whether cash, property, or services.
• Profit and loss allocation. How profits and losses are divided and how distributions are made.
• Management structure. Whether the LLC is member managed, run by the owners, or manager managed, run by appointed managers.
• Voting rights. How votes are counted and what decisions need a majority or a unanimous vote.
• Meetings and records. How and when members meet and what records are kept.
• Adding or removing members. How a new member joins and what happens when one leaves, sells, or dies.
• Buy-sell terms. How a departing member's interest is valued and transferred.
• Dissolution. How the LLC is wound down and assets are distributed.

Member managed vs manager managed

One of the main choices in an operating agreement is how the company is run. In a member managed LLC, the owners handle day to day decisions themselves, which suits small businesses where everyone is involved. In a manager managed LLC, the members appoint one or more managers, who may or may not be owners, to run the business, which suits companies with passive investors or many members. The agreement should state clearly which structure applies and what authority the managers have.

Single-member vs multi-member LLCs

A single member LLC has one owner, and its operating agreement is simpler, but it is still worth having. It documents that the business is separate from you personally, sets out what happens if you become unable to run it, and helps with banks and future changes. A multi member LLC has two or more owners, and the agreement does much heavier work, since it must resolve how people share money, make decisions, and handle a member leaving. The more owners, the more important a detailed agreement becomes.

How to write an operating agreement step by step

1. Confirm your LLC is formed. File the articles of organization with your state first.
2. List the members and ownership. Record each owner's name and percentage.
3. Record contributions. Note what each member contributed.
4. Decide how profits are split. Often by ownership percentage, but you can choose another split.
5. Choose the management structure. Member managed or manager managed, with the powers spelled out.
6. Set voting and decision rules. Define what needs a majority and what needs unanimous consent.
7. Plan for change. Add terms for adding members, buyouts, and dissolution.
8. Sign and store it. All members sign, and the company keeps the agreement with its records.

Operating agreements outside the US

The LLC is a United States business structure. In Canada, businesses more commonly use corporations or partnerships, and the equivalent internal documents are a shareholders agreement for a corporation or a partnership agreement for a partnership. If you are in Canada, the same idea applies, that owners should put their arrangement in writing, but the entity and the document have different names, so use the form that matches your structure.

How profits and taxes flow through an LLC

One reason people choose an LLC is its flexible tax treatment, and the operating agreement is where the profit sharing is documented. By default, a single member LLC is treated as a disregarded entity and a multi member LLC as a partnership, meaning the profits pass through to the owners and are reported on their personal returns rather than taxed at the company level. An LLC can also elect to be taxed as a corporation if that fits better. The operating agreement should state how profits and losses are allocated and when distributions are made, since owners rely on it to know what they will receive and how their share of income is figured. Tax treatment can be involved, so this is a good area to review with an accountant.

Common operating agreement mistakes

• Skipping it entirely. Relying on default state rules can lead to outcomes no owner wanted, especially when a member leaves.
• Vague ownership or profit terms. Percentages and distribution rules should be exact, not implied.
• No exit plan. Failing to say what happens when a member wants out, dies, or becomes unable to serve invites disputes.
• Ignoring the buy-sell terms. Without a way to value and transfer a departing member's interest, a breakup can stall the whole company.
• Never updating it. An agreement that no longer matches how the business actually runs can cause confusion later.

Amending the agreement

An operating agreement is not meant to sit untouched forever. As the business grows, members join or leave, ownership shifts, or the way you run the company changes, and the agreement should keep up. Most agreements include a section on how amendments are made, usually requiring a written change approved by a stated share of the members. When you amend it, record the change in writing, have the required members sign, and keep the updated version with your company records alongside the original. Keeping the document current is what makes it useful if a question or dispute ever comes up.

Fill out and sign an operating agreement online

You can complete an operating agreement on your computer without printing. Open our fill a PDF tool, add an operating agreement template, type in the members, ownership percentages, and management terms, and download the finished document. It is processed in your browser, so your company details stay on your own device.

When it is ready, the sign a PDF tool lets each member draw, type, or upload a signature and place it on the page. For related formation paperwork, browse the form templates library.

Keep your company documents together

An LLC generates a set of core records that you will update as the business grows. Create a free account on fillable.ca to save your operating agreement, revise it when members or terms change, and keep all your company paperwork in one place.