LLC Operating Agreement: What It Is and Why You Need One

When you form an LLC, the state gives you a Certificate of Formation. But the document that actually governs how your LLC operates is the operating agreement — and most states don't require you to file it anywhere. That doesn't mean you should skip it.

An operating agreement is a legal document that defines the internal rules of your LLC. It covers:

• Ownership structure — who owns what percentage of the LLC
• Management structure — member-managed vs. manager-managed
• Profit and loss allocation — how income and losses are distributed
• Voting rights — how decisions are made and what requires unanimous consent
• Capital contributions — what each member contributed to start the business
• Distributions — when and how profits are distributed to members
• Transfer of membership interests — what happens if a member wants to sell their interest
• Dissolution — what happens if the LLC is wound down

Many solo business owners think an operating agreement is only necessary for multi-member LLCs. That's wrong. Here's why single-member LLCs need one too:

1. Banks often require it — Many banks ask for your operating agreement when opening a business account.
2. It reinforces the corporate veil — Having formal documentation of your LLC's operations strengthens the liability protection.
3. It protects you if you add a member later — Having an agreement in place makes it much easier to bring on a partner.
4. It documents your intentions — If there's ever a dispute or legal question, your operating agreement is the governing document.

Without an operating agreement, your LLC is governed by your state's default LLC rules. Those rules may not reflect what you want. For example, some states default to equal profit sharing regardless of ownership percentage.

An operating agreement doesn't need to be complex for a simple single-member LLC. For multi-member LLCs, especially those with unequal ownership or complex arrangements, it's worth having an attorney review it.

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