What is an LLC Operating Agreement?

An LLC operating agreement is a legal document that safeguards your business by detailing the roles and financial responsibilities of members and managers.

We’ll help you answer “What is an LLC operating agreement“ and provide you with free resources to help you create one for your business.

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What’s Inside an Operating Agreement?

There are six main articles of an operating agreement:

1. Organizational Structure: This section outlines the initial members or owners of the LLC, their ownership percentages, and how much they initially invested in the company.
2. Management and Voting: This details how the LLC will be managed (i.e., member-managed or manager-managed), as well as how voting rights will be determined (e.g., how many votes each member gets, whether votes are decided by a majority or unanimously, etc.).
3. Capital Contributions: Describes the amount of money or resources each member has contributed to the LLC and outlines procedures for future capital contributions if required.
4. Distributions: Explains how the company's profits and losses will be allocated among the members and how and when members will receive profit distributions.
5. Membership Changes: Provides rules for adding or removing members, transferring ownership shares, or what happens in the event of a member's death or incapacity.
6. Dissolution: Lays out the process for dissolving the LLC, including who makes the decision, how assets are distributed, and the obligations for final tax returns and legal notifications.

Every business is unique, so LLC operating agreements should be tailored to meet the structure and needs of each limited liability company.

Northwest will set up your LLC and provide you with an operating agreement for only $29 plus the required state filing fee.

Types of Operating Agreements

An operating agreement outlines operations and legalities for an LLC. Depending on how many members you have and the way your LLC is set up, your operating agreement’s structure will vary.

Single-Member LLCs

Since single-member LLCs only have one member — the owner — their operating agreements are typically simpler than their multi-member counterparts.

However, it’s important when writing your operating agreement to consider what will happen if you choose to add anyone else to your LLC. If you decide to accept new members, you will likely need to draft a new operating agreement.

Multi-Member LLCs

Multi-member LLC operating agreements will likely have more considerations, such as membership interests, voting rights, and how adding or removing members will play out.

Multi-member LLCs can be divided into two main categories: member-managed and manager-managed.

Member-Managed LLCs

As the name suggests, a member-managed LLC is one that’s run by its members, who oversee the daily operations of the LLC. Most LLCs fall into this category.

Manager-Managed LLCs

By contrast, manager-managed LLCs are managed by a third-party manager (or managers) instead of its members.

While a manager-managed LLC operating agreement will be similar to its member-managed counterpart, it should include its manager’s information in Article 2 (management and voting).

Note: If you already have an LLC, here is a free operating agreement template. If you still need to form an LLC, read our top formation services guide.

Is an LLC Operating Agreement Required?

Most states do not legally require LLCs to have their own operating agreements, but they do recognize them as legally binding documents so long as they fall within the parameters of the law.

Determining State Requirements

In the states of Maine, Missouri, and New York, an operating agreement is legally required for LLCs. This is true for single-member LLCs and multi-member LLCs.

For other states, however, it can be difficult to determine what is required according to statute.

For example, while most states do not require an LLC to have an operating agreement, they note that any operating agreement will be legally binding. What’s more, LLCs do not need to file their operating agreements with the state — even ones that require it. In fact, some states even allow operating agreements to be verbal or even just implied.

Regardless of your state’s requirements, it’s good practice to keep a physical, written operating agreement. Without an operating agreement, LLC owners must comply with the state’s default rules. An operating agreement covers a business entity beyond the default rules.

Operating Agreement Requirements by State

Every state has its own laws regarding operating agreements. These statutes may change periodically, so it’s important to know your state's current laws.

You can find your state’s LLC operating agreement statute below to learn more. Note that some states may refer to an operating agreement as a “limited liability company agreement” or just a “company agreement.”