Operating Agreement

An operating agreement is the basic written agreement between the members (i.e., owners) of the LLC, or between the members and the managers of the company, if there are managers. In most states, creating an operating agreement is not a legal requirement, but it is highly advisable for the smooth operation of your business and for avoiding internal disputes. Even if you will form a single-member LLC, you should create an operating agreement between yourself (as a member) and the company in order to separate your business and personal affairs. Many states have laws saying that an operating agreement for a single-member LLC is not invalid simply because only one individual signed the document.

Although there is no set criteria for the content of an operating agreement, it usually covers topics such as:

  • the initial members of the LLC;
  • the members' percentage interests in the business;
  • the allocation of profits and losses among members;
  • the capital contributions of members;
  • the members' voting power;
  • the desired management structure -- i.e., whether the LLC is to be managed by its members in a de-centralized fashion ("member-managed") or by some designated group of managers (who may or may not be members as well) in a centralized fashion ("manager-managed");
  • in the event that the company will be run by managers (or some subset of the members), the agreement should set out the division of responsibility between managers and members, and describe the roles that managers and members are expected to play in operating the business;
  • procedures for admitting new members and for member withdrawal;
  • rules for holding meetings and taking votes; and
  • "buy-sell" provisions, which set out rules for what to do when a member wants to sell his or her interest, dies, or becomes disabled.

Free sample operating agreements for most U.S. states are available from the Internet Legal Research Group. Whether or not you need the assistance of a lawyer to craft a good operating agreement depends upon the level of customization you want to achieve.

An operating agreements does not have to be filed with the state like the articles of organization, and they may be changed without officially filing amendments. If you do alter the agreement, remember to keep a copy of the previous version on file.