A legal document that outlines the ownership, structure, and operating rules of an LLC.
What is an Operating Agreement?
An Operating Agreement is an internal legal document used by Limited Liability Companies (LLCs) to define how the business will be run. It covers key details such as ownership percentages (membership interests), each member’s rights and responsibilities, how profits and losses will be allocated, voting rights, management structure, procedures for admitting new members, and what happens if the business dissolves.
While not always required by state law, an Operating Agreement is highly recommended for both single-member and multi-member LLCs. It serves as proof of the LLC’s separate legal existence, helping maintain liability protection by showing that the company is operated distinctly from its owner(s). For multi-member LLCs, it reduces the risk of disputes by clearly documenting agreements about decision-making, distributions, and exit terms.
For non-U.S. founders, an Operating Agreement is often required by banks, payment processors, and potential investors before opening accounts or entering contracts. Some states also require one for compliance purposes, even if it’s not submitted to the state. Without an Operating Agreement, an LLC is governed by default state rules, which may not reflect the owners’ preferences.
