Why You Need an Operating Agreement For Your LLC

Leela Hopkins Last updated December 27, 2019

An operating agreement is a document that works as an instruction manual for your business. When forming a Limited Liability Company (LLC), it is recommended that you create one to protect your business. This guide will walk you through drafting an operating agreement and discuss why it is important to have one for your LLC.

What is an Operating Agreement

An operating agreement is a key legal document every LLC should put together in order to outline the rules and regulations regarding ownership and structure as well as the financial and operational layout for the company.

Once all the members of an LLC have signed the operating agreement, it becomes official and binds the signatories to its terms.

If you are forming an LLC in California, Delaware, New York, Missouri, or Maine, you are required to create an operating agreement. Note that no state requires that you file an operating agreement with the Secretary of State. Your operating agreement is an internal contract that you will keep with your company records.

Why is an Operating Agreement Important

Drafting an operating agreement for your LLC will help set up the organization for how your company will be run. An operating agreement describes the internal operations of the LLC. It details the formation of the business and the procedures to be followed by the business.

The most important reasons to have an operating agreement are:

Overall, it will alleviate disputes among members and save you time, resources, and trouble in case of unforeseen events and difficulties that you may face.

Who Needs Your Operating Agreement

As mentioned above, the operating agreement isn’t a necessary legal document in every state. However, some institutions and professionals may require a copy. Examples include:

Did You Know? If an LLC has no operating agreement, it is subject to the "default rules" of the state in which the LLC is organized. In other words, if you don’t have an operating agreement, you are letting the state tell you how to dispose of your business assets.

What is Included in an Operating Agreement

The contents of an operating agreement may vary depending on the number of members, the nature of the business, and the ownership/management structure. They commonly include sections on organization and ownership, management, voting, contributions, distributions, compensations, and bookkeeping.

Article I - Company Formation

A lot of the information you provide in this section will be the same as your Articles of Organization. It’s best that you have that on hand.

Article II - Capital Contributions

This section contains the names of all members who have contributed their financials to founding the LLC, as well as the total amounts of money they have provided. Members can also provide the LLC with property. If a member contributes to the LLC in exchange for ownership, this is called a capital interest, and it is normally proportionate to the percentage of the company a member owns.

Article III - Describe How Profits and Losses are Distributed

In this section, you will specify the way profits and losses are to be shared among the members. The definition of a company’s profits and losses is the money raised and lost in a given year. If you are the sole member of an LLC, 100% of profits and losses go to you.

This section also determines the percentage of distributions the members receive instead of salary, and how often (yearly or quarterly). It also clarifies how LLC funds are contributed and distributed to the owner. This is helpful to the owner and a good way to ensure that appropriate records are being kept.

Article IV - Choose a Management Structure

This part of the document determines the power given to individual members, managers, and officers. It should specify who may sign legally binding contracts and crucial documents and set up bank accounts, and what kind of authority they have over the LLC’s affairs.

Overall, this section regulates the voting process for decision-making within the company: how the votes are allocated and the number of votes needed to come to a decision on particular actions.

Article V - Identify Your Officers

An LLC’s officers are in charge of day-to-day tasks and operations under managerial or owner supervision. One company may have only one or several officers, and there is no limit to how many the organization may have. The same member can hold all the offices, but if you have two or more officers, the president and the secretary should not be the same person. It is also not required for an LLC to appoint officers, but if it has, they should be named and their role described in this part of the operating agreement.

Identify the responsibilities and tasks of members who get leadership roles and how they’ll be selected for these roles.

Article VI - Compensation Structure

This section determines how much members will be paid and ways they can be compensated for their work.

Requirements in the compensation structure should include the following details:

Noting everything down in the operating agreement prevents potential feuds and gives a stable set of rules to work by.

Article VII - Describe Bookkeeping

This part of the operating agreement describes the bookkeeping system which will be utilized to keep track of the expenses. It addresses record-keeping and the rights of members to inspect the company’s corporate and accounting records.

Article VIII - Establish Transfer Procedures

This section defines what happens when a member exits the company. It should state how their shares are split, distributed, and reimbursed. Also, it should note how their interest will be valued for the purpose of a transfer. Be sure to specify if members can transfer their part of the ownership of the LLC and in what way.

Other Possible Sections to Include in Your Operating Agreement

Maintaining Your Operating Agreement

Even simple changes such as an address change should be noted. The best practice is to store all important files, documents, receipts, and previous versions of the operating agreement in a designated space. For complex changes, it is best to hire professionals.

Also, you should keep your records on file for 3-5 years. The IRS states that, in general, you need to keep records until the period of limitations runs out. This applies to tax returns and property-related records. Some creditors, investors, or insurance companies may require you to keep the records longer than the IRS does.

Resources For Creating an LLC Operating Agreement

Below is a list of websites that will allow you to create an operating agreement.

Free Operating Agreement Templates

Generate Your Own Operating Agreement


Putting an operating agreement together is a critical task for the success of your business and it is advised that you create one. An operating agreement provides a clear set of rules that help map out the structure of how your company will be run. Most important, it will enforce asset protection, assignment and limitations of powers, profit/loss sharing, and ownership.

Moreover, the operating agreement will set the process on dissolution handling, how ownership can be sold or purchased, and how the ownership shares should be priced.

As a result, an operating agreement will protect your business from potential internal and external disputes that you may face during, before, and after the formation of your LLC.

What’s Next After Forming Your Operating Agreement?

After completing your operating agreement you’ll need to get your EIN. Applying online is the best and fastest way to obtain your EIN. Get this step-by-step guide on how to apply for your EIN online.

Leela Hopkins


Marketing Specialist at VirtualPostMail. I am dedicated to bringing you useful information to help you run your business remotely. My ultimate goal is to help you successfully take your business fully remote.

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