Operating Agreement: Why Every LLC Needs One
Oct 21, 2025
Creating an Operating Agreement is an important thing to do for business owners who form an LLC if you don't want to struggle along the way. Why? Simply because this protects the business and personal assets therefore, it can save you from financial and legal headaches later.
Moreover, it defines how your business runs, how decisions are made, and what happens when ownership changes.
In this guide, we will break it all down for you to easily understand it and know exactly what an Operating Agreement is, why it matters, and how to create one that fits your LLC.
What Is an LLC Operating Agreement?
An LLC Operating Agreement is a legal document that summarizes how your business operates, this includes who owns it, how profits are shared, and how major decisions are made.
For simplicity, think of it as your company’s internal rulebook meaning it’s like a written contract between LLC members that defines everyone’s rights, duties, and responsibilities. Moreover, it helps prevent misunderstandings and gives your business structure and clarity.
It is important to note that even if you’re running a single-member LLC, you still need one. Since having a signed Operating Agreement helps prove your business is separate from you personally, which strengthens your legal protection.
Is an Operating Agreement Legally Required?
Not always, but it’s always smart to have one.
Only a few states legally require LLCs to maintain an Operating Agreement, including California, Delaware, Maine, Missouri, and New York.
But even in states where it’s optional, most experts strongly recommend it. Why? Because if a dispute arises and you don’t have an Operating Agreement, your business automatically defaults to state laws.
Example
If your state law says profits must be split evenly among members, but you’ve invested 80% of the capital, you could end up sharing profits equally with a partner who contributed far less.
An Operating Agreement avoids that kind of mess by spelling out exactly how your LLC operates from day one.
Why an Operating Agreement Is Essential for Your LLC
An Operating Agreement isn’t just paperwork, it’s the foundation of your LLC’s protection and stability. Also, it keeps your business legally separate, defines how it runs, and prevents costly misunderstandings down the road.
Why Every LLC Should Have One (Big or Small)
1. Protects Your Personal Assets
Your LLC exists to shield your personal property like your home and savings from business liabilities. But that protection only holds if you keep your business legally distinct from yourself. Moreover, a signed Operating Agreement proves your LLC is a legitimate, separate entity, helping you avoid “piercing the corporate veil” in legal disputes.
2. Prevents Member Disputes
When multiple owners are involved, disagreements are inevitable. With operating agreement, it outlines everyone’s roles, voting power, and share of profits. This clarity keeps decisions fair and reduces the risk of conflicts turning into lawsuits.
3. Builds Credibility
Oftentimes, banks, investors, and even clients will ask for your Operating Agreement as this shows if you run your business professionally and understand your legal obligations. Moreover, if you want to apply for loans or form partnerships, it can help you get a better chance for approval.
4. Keeps You in Control
Without your own rules, state default laws decide how your LLC operates. That can mean profits split evenly even if one member invested more, or major decisions requiring unanimous approval. But with a customized Operating Agreement, it ensures you have control in your business’ operations.
What Can Go Wrong Without One
Skipping an Operating Agreement can cost you in both time and money. Without it:
State default laws dictate how profits and voting power are divided.
Disputes between partners often end up in court with no clear documentation.
Courts may question your LLC’s legitimacy, weakening your liability protection.
Therefore, not having one leaves your business vulnerable from legal, financial, and operational aspects.
Key Sections of an LLC Operating Agreement
Every Operating Agreement should include several key parts. These ensure your document is clear, enforceable, and useful for daily operations.
1. Basic Information
Start with the essentials:
LLC name and address
Formation date
Registered agent information
Business purpose
This section confirms your LLC’s legal identity and scope of activity.
2. Ownership Details
List all members and their ownership percentages. You can split ownership by:
Capital contributions (how much money each person invested)
Work contributions (time, skills, or services provided)
Or any other agreed formula
3. Management Structure
LLCs can be:
Member-managed – all owners share decision-making power.
Manager-managed – one or more appointed managers run daily operations.
State which applies to your business, and name your managers if relevant.
4. Voting Rights and Procedures
Define how votes work.
Will decisions require a majority or unanimous vote?
What counts as a “major” decision like hiring staff, taking on debt, or dissolving the company?
Therefore, having this in writing, you could prevent future arguments.
5. Profit and Loss Allocation
Detail how profits and losses will be divided.
Many LLCs split this according to ownership percentages, but you can set any arrangement you agree on.
6. Adding or Removing Members
Include clear steps for:
Bringing in new owners
Handling member departures or retirements
Transferring ownership interest
Without this, you could end up stuck with unwanted partners or unclear exits.
7. Dissolution Rules
State what happens if your LLC closes:
Who gets remaining assets
How debts are paid
How members are notified
Even if you never plan to dissolve, having a plan avoids chaos in worst-case scenarios.
8. Amendment Process
Every business evolves.
Include a clause explaining how you’ll update or amend the agreement which could be done usually through majority vote or unanimous consent.
How to Create an LLC Operating Agreement
You don’t need a lawyer to create one, but it helps to get legal guidance, especially if your business has multiple members.
Here are your options:
1. DIY Approach
You can write your own Operating Agreement using a reputable online template.
Just make sure to:
Replace generic language with your actual business details
Review it carefully with all members
Sign and date it properly
This option is low-cost and great for single-member LLCs.
2. Hire a Professional
A small business attorney or CPA can tailor your Operating Agreement to fit your goals, structure, and tax situation.
This is worth it for complex LLCs or partnerships where money, voting, and management need extra clarity.
3. Use Online Formation Services
Services like LegalZoom, ZenBusiness, or Northwest Registered Agent often include an Operating Agreement template when you form your LLC through them.
It’s a quick, affordable middle ground between DIY and legal counsel.
Step-by-Step: How to Finalize It
Write or download a draft template.
Customize it with your LLC details and ownership terms.
Review it together with all members.
Sign and date it.
Store copies securely — one for each member and one in your business records.
Tip: Update it whenever your ownership structure, profit sharing, or management changes.
Common Mistakes to Avoid
Even experienced business owners make errors when drafting Operating Agreements. Here’s what to watch out for:
1. Not Signing or Dating the Document
An unsigned Operating Agreement has no legal power. Make sure every member signs it, ideally in front of a notary.
2. Using a Generic Template
Free templates are fine as starting points, but many skip key details or use outdated legal terms. That is why it is better to always customize the document for your state and business model.
3. Forgetting to Update It
Businesses evolve wherein new partners join, profit splits change, or management shifts. Make sure to update your Operating Agreement each time something significant changes.
4. Leaving Out Voting Rules
This is one of the biggest sources of disputes. Be clear on who can vote, how votes are counted, and what requires unanimous consent.
5. Ignoring Dissolution Clauses
No one likes to think about closing a business, but including a clear dissolution plan prevents conflict and legal issues if it happens.
Conclusion
You may think that an Operating Agreement is just another form of document, but it’s the backbone of your LLC. It defines ownership, prevents disputes, protects your personal assets, and shows the world your business is legitimate.
Whether you’re running a one-person shop or a growing partnership, make sure to create and regularly update this document. It’s one of the simplest ways to protect your business and your future.
Final Tip:
Start your LLC with a solid foundation. Read our full guide on How to Choose the Right Business Structure: LLC vs. S-Corp Basics to decide which setup makes the most sense before drafting your Operating Agreement.
Frequently Asked Questions
What should be included in an LLC Operating Agreement?
It should outline ownership percentages, voting rights, management roles, profit distribution, and steps for adding or removing members.
Can I write my own Operating Agreement?
Yes, you can draft it yourself or use an online template. Just make sure it’s tailored to your business and reviewed by a professional if possible.
Do single-member LLCs need one?
Absolutely. Even if you’re the only owner, it proves your LLC is separate from you personally and helps preserve your liability protection.
How often should I update it?
Update it whenever your business structure changes like adding new members or changing profit splits. Reviewing it yearly is a good habit.
What happens if I don’t have one?
State default laws take over, which can create unfair or unintended outcomes in ownership, taxation, and dispute resolution.
Do I need to file it with the state?
Usually not. Most states don’t require you to file your Operating Agreement, but you should keep it in your business records and provide copies to all members.
Who should draft the Operating Agreement?
Ideally, an experienced business attorney or CPA should help draft your Operating Agreement, especially if your LLC has multiple members. They can tailor it to your business needs and ensure it meets state laws.
Can I get a free Operating Agreement?
Yes, there are several online platforms that offer free Operating Agreement templates like PandaDoc, Jotform, and LawDepot. Just make sure to customize them with your real ownership details and state requirements since generic templates often miss key legal points.
What legal clauses should every Operating Agreement include?
Every Operating Agreement should include clauses on ownership, voting rights, management structure, profit distribution, dispute resolution, and dissolution. These protect both the business and its members.
How do state laws differ on Operating Agreement requirements?
Some states, like California and New York, require LLCs to have an Operating Agreement. Others make it optional, but default state laws apply if you don’t create one — which can limit your control over profits and decisions.