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LLC Operating Agreement: What It Is, What to Include, and How to Create One

An LLC operating agreement is an internal document that explains how a limited liability company will be owned, managed, and operated. It can set rules for members, decision-making, profits, responsibilities, and changes within the business.

State rules differ. Some states require an operating agreement, while others do not. Even when one is not required, having a written agreement can help establish clear business rules and document how the LLC will operate.

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What Is an Operating Agreement?

If you are asking what is an operating agreement, it is a written document that sets out the internal rules of an LLC. It can explain who owns the company, how decisions are made, how profits and losses are handled, and what happens when a member joins, leaves, or transfers an ownership interest. An operating agreement can be especially useful when an LLC has multiple owners because it gives members a written framework for handling important business decisions. The agreement is generally kept with the LLC's business records rather than filed with the state.
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Why Does an LLC Need an Operating Agreement?

An operating agreement gives the owners a place to document how their company will work. Without a written agreement, applicable state LLC rules may determine how certain matters are handled. A clear agreement allows owners to establish rules that fit their business, as long as those provisions comply with applicable law.
An operating agreement can help with:
  • Defining ownership interests
  • Setting management responsibilities
  • Establishing voting procedures
  • Documenting member contributions
  • Explaining profit and loss distributions
  • Addressing ownership transfers
  • Establishing procedures for adding members
  • Planning for dissolution
For a multi-member LLC, putting these matters in writing can also reduce confusion between owners.

What Should an LLC Operating Agreement Include?

The contents depend on the LLC and state law, but a well-prepared agreement commonly addresses several key areas.

Company Information

Start with basic details about the LLC, including its legal name, formation state, business purpose, and principal business address. You may also include information about the registered agent and the date the agreement becomes effective.

Ownership and Membership

The agreement can identify the members and explain their ownership interests. For a multi-member LLC, clearly documenting each member's interest can help avoid confusion about ownership and distributions.

Capital Contributions

Members may contribute money, property, or other assets to the LLC. The agreement can document initial contributions and explain whether members may be required to make additional contributions later.

Management

An LLC can be member-managed or manager-managed. Your operating agreement can explain who has authority to make business decisions and what responsibilities belong to members or managers.

Voting and Decision-Making

The agreement can establish how important business decisions are approved. It may explain voting rights, required approval levels, and procedures for handling major decisions.

Profits and Losses

The agreement can explain how the LLC allocates profits and losses among its members. It can also establish rules for distributions and the timing of payments.

Ownership Transfers

An operating agreement can establish rules for transferring membership interests. This can become important when a member wants to sell, transfer, or otherwise leave their ownership position. The IRS recognizes governance policies and procedures as important considerations for tax compliance and nonprofit management.

Dissolution

The agreement can explain what happens if the LLC needs to close. It may address events that can lead to dissolution and how the company's remaining assets and obligations will be handled.
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  • LLC ownership
  • Business purpose
  • Initial contributions
  • Management
  • Recordkeeping
  • Distributions
  • Changes to the business
  • Dissolution

Single Member LLC Operating Agreement

A single member LLC operating agreement is designed for an LLC with one owner.
There may be only one member, but the document can still be useful for documenting how the business is organized and managed.
A single-member LLC generally does not need provisions for voting between multiple owners, but it should still clearly document the company's structure.
Some states do not require single-member LLCs to have an operating agreement, while others have different requirements. Check the rules that apply to your LLC.

Multi-Member LLC Operating Agreement

An LLC with two or more members can use an operating agreement to define the relationship between the owners.
The agreement can address ownership percentages, voting rights, member contributions, distributions, management duties, and procedures for resolving business issues.
For a multi-member LLC, discussing these matters before problems arise can help create clearer expectations among the owners.
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Operating Agreement Template

An operating agreement template provides a starting point for creating the document. A template can help you organize common sections such as company formation, ownership, contributions, management, distributions, voting, transfers, and dissolution. However, a general template may not address every requirement or situation that applies to your LLC. State laws vary, so review the template carefully and make sure it fits your LLC. If your business has multiple owners, complex ownership arrangements, investors, or unusual management terms, consider getting legal advice before signing the agreement.
  • Your LLC's state requirements
  • Number of LLC members
  • Management structure
  • Ownership interests
  • Contribution arrangements
  • Distribution rules
  • Transfer provisions
  • Dissolution provisions

Free LLC Operating Agreement

A free LLC operating agreement template can be useful if you want a starting point for documenting your company's internal rules.
Free templates can help you understand the types of provisions commonly found in an operating agreement. They should not be treated as automatically suitable for every LLC.
A template is a starting document. Your final agreement should reflect your actual business structure and applicable state law.
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Do You File an Operating Agreement With the State?

In many states, an operating agreement is an internal LLC document and does not need to be filed with the Secretary of State.
Instead, the LLC keeps the signed agreement with its business records.
This is different from Articles of Organization or similar formation documents, which are generally submitted to the state to create the LLC.
Because state requirements vary, check the rules for the state where your LLC is formed.

When Should You Create an Operating Agreement?

It is usually best to create the agreement when you form your LLC. Creating it early gives the owners a written record of how the business will operate from the beginning

 You should also review the agreement when something important changes, such as:
  • Adding a new member
  • Removing a member
  • Changing ownership
  • Changing management
  • Changing distribution rules
  • Making major changes to the business
Keep the current signed version with your LLC records.

Operating Agreement vs Articles of Organization

These two documents serve different purposes.
 Articles of Organization, or a similar formation document, are submitted to the state to establish an LLC. An operating agreement is an internal document that explains how the LLC will operate. The Articles of Organization provide the state's formation record. The operating agreement provides the internal rules for the owners and business. Both documents can play an important role in maintaining organized LLC records.
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Keep Your LLC Documents Organized

Your operating agreement is only one part of your LLC records.
You may also need to maintain formation documents, amendments, annual reports, business licenses, tax records, resolutions, and other important documents.
Keep signed and current copies in a secure location. Update your records when the structure or ownership of the LLC changes.
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Frequently Asked Questions

Everything you need to know about setting up your limited liability company.

The requirement depends on the state and type of LLC. Some states require one, while others do not. Even where it is not mandatory, an operating agreement can help document how the LLC will operate.

It sets out internal rules for an LLC, including ownership, management, voting, contributions, distributions, ownership transfers, and dissolution.

A single-member LLC may not be required to have one in every state. However, a written agreement can document the company’s structure and operating rules.

Yes. A template can provide a starting point for creating an LLC operating agreement. Make sure it fits your business structure and complies with the laws that apply to your LLC.

A free template can be useful for straightforward LLCs, but it may not address every situation. If your LLC has complex ownership, investors, multiple members, or unusual arrangements, consider getting legal advice.

In many states, no. An operating agreement is generally kept as an internal business record rather than filed with the state. Requirements vary by jurisdiction.

Yes. An LLC can generally amend its operating agreement when the business changes, subject to the agreement itself and applicable state law.

It can include the LLC’s name, owner information, business purpose, management structure, contributions, distributions, recordkeeping procedures, and dissolution rules.

Articles of Organization are generally used to form the LLC with the state. An operating agreement establishes the internal rules for operating the LLC.