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An operating agreement is the foundational internal document for a limited liability company (LLC). It defines member ownership, management structure, profit distribution, and operational procedures - essentially serving the same role bylaws play for corporations.

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What is an operating agreement?

The operating agreement governs how your LLC operates:
While not always legally required, an operating agreement is essential for multi-member LLCs and highly recommended even for single-member LLCs.

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Why you need an operating agreement

Operating agreements serve critical functions:

Define ownership

Clearly establish each member’s ownership percentage and capital contributions

Protect relationships

Prevent disputes by documenting agreed-upon arrangements

Override default rules

Replace state default LLC rules with provisions suited to your business

Prove legitimacy

Banks and investors require operating agreements to verify ownership

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Operating agreement vs. bylaws

Understand the LLC equivalent of corporate documents:
CorporationLLC
Certificate of IncorporationCertificate of Formation
BylawsOperating Agreement
ShareholdersMembers
Shares/StockMembership Interests
Board of DirectorsManagers (if manager-managed)
LLCs offer more flexibility than corporations. Operating agreements can be customized extensively without filing anything with the state.

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What’s covered in an operating agreement?

Comprehensive operating agreements address these areas:
Basic information about the LLC:
  • LLC name: Legal name as filed with state
  • Principal place of business: Main business address
  • Purpose: General business purpose (usually broad)
  • Term: Duration of LLC (usually perpetual)
  • Formation date: When certificate was filed
Most LLCs use broad purpose language like “any lawful business activity.”
Who owns the LLC and in what proportions:
  • Member names: All LLC members
  • Initial contributions: Cash, property, or services each member contributed
  • Ownership percentages: Each member’s percentage interest
  • Additional contributions: Rules for future capital contributions
  • Admission of new members: Process for adding members
Ownership percentages should total 100%. They determine voting rights and profit distributions unless you specify otherwise.
How the LLC is managed:Member-managed: All members participate in management
  • All members vote on major decisions
  • Day-to-day operations handled by members
  • No separate manager role
  • Common for small LLCs where all members are active
Manager-managed: Designated managers run operations
  • Members appoint one or more managers
  • Managers handle day-to-day decisions
  • Members vote only on major issues
  • Common when some members are passive investors
Choose carefully - changing from member-managed to manager-managed (or vice versa) typically requires amending your state filing.
How decisions are made:
  • Voting percentages: Usually proportional to ownership
  • Ordinary decisions: Threshold for routine matters (often majority)
  • Major decisions: Higher threshold for significant actions (often supermajority or unanimous)
  • Meeting requirements: How and when members meet
  • Written consent: Ability to approve actions via written consent
Major decisions typically include:
  • Amending operating agreement
  • Admitting new members
  • Selling major assets
  • Dissolving the LLC
  • Taking on significant debt
How money flows into the LLC:
  • Initial contributions: What each member contributed at formation
  • Additional capital calls: Whether LLC can require more contributions
  • Capital accounts: Tracking each member’s investment and distributions
  • Return of contributions: Whether and when contributions are returned
  • Consequences of non-payment: What happens if member doesn’t contribute when required
How earnings and losses are distributed:
  • Distribution schedule: When profits are distributed (quarterly, annually, etc.)
  • Allocation method: Usually proportional to ownership, but can differ
  • Tax allocations: How profits/losses are allocated for tax purposes
  • Reserves: Whether LLC retains earnings for business needs
You can allocate profits differently than ownership percentages, but tax allocations must have “substantial economic effect” under IRS rules.
Rules for selling or transferring membership interests:
  • Transfer restrictions: Members can’t freely transfer interests
  • Right of first refusal: Existing members can buy before outside sale
  • Drag-along rights: Majority can force minority to sell with them
  • Tag-along rights: Minority can join when majority sells
  • Buy-sell provisions: Mechanisms for one member to buy out another
Without transfer restrictions, members could sell to anyone, bringing in unwanted partners. Always include transfer provisions.
What happens when the LLC ends:
  • Dissolution triggers: Events that cause dissolution (member withdrawal, vote, bankruptcy)
  • Winding up: Process for closing business and paying debts
  • Asset distribution: Order of paying creditors and distributing remaining assets
  • Continuation: Whether remaining members can continue LLC after dissolution event

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Single-member vs. multi-member agreements

Operating agreements differ based on number of members:

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Single-member LLC agreement

Simpler structure for solo owner:
  • Establishes you as sole member
  • Documents initial capital contribution
  • Confirms member-managed structure
  • Shows LLC is separate from personal assets (for liability protection)
  • Typically 5-10 pages
Even with one member, an operating agreement proves the LLC is legitimate and separate from you personally - crucial for liability protection.

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Multi-member LLC agreement

More complex for multiple owners:
  • Defines each member’s ownership percentage
  • Establishes voting rights and decision-making
  • Addresses profit distribution and capital contributions
  • Includes transfer restrictions and buy-sell provisions
  • Prevents disputes with clear procedures
  • Typically 15-30 pages
Multi-member LLCs without operating agreements are governed by state default rules, which are usually terrible for business relationships.

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Standard operating agreement templates

Several sources provide model operating agreements:

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New York LLC operating agreement

Commonly adapted template:
While this is New York-specific, the structure works for most states. Adjust for your state’s specific requirements.

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Delaware LLC operating agreement

For Delaware LLCs:
  • Delaware LLC Package: Includes Certificate of Formation and Operating Agreement
  • Designed for startups that may convert to corporation later
  • More flexible than traditional LLC agreements

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Key provisions for startups

If using an LLC for your startup, include these provisions:

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Vesting for member interests

Protect the LLC if a member leaves early: 
Member interests shall vest over 4 years, with a 1-year cliff.
If a member ceases active participation, unvested interests 
are forfeited back to the LLC.
Vesting is standard for startup corporations but less common in LLCs. Add it explicitly if you want this protection.

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Authority to bind the LLC

Specify who can sign contracts:
  • Limit authority to specific members or managers
  • Set dollar thresholds requiring approval
  • Define what actions require member vote

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Capital call provisions

Plan for future funding needs:
  • Whether LLC can require additional contributions
  • Notice requirements for capital calls
  • Consequences if member can’t contribute
  • Dilution of non-contributing members

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Conversion to corporation

If you might raise VC funding later: 
Members agree to cooperate in converting the LLC to a 
C-corporation structure if required by investors, with 
membership interests converting to equivalent stock ownership.
VCs typically won’t invest in LLCs due to tax complexity. Include conversion language if you might raise institutional funding.

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Management structure details

Choose the structure that fits your situation:

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Member-managed LLC

Best when:
  • All members actively work in the business
  • You want democratic decision-making
  • The LLC is small (2-5 members)
  • No passive investors
Voting: Usually proportional to ownership or one vote per member Authority: All members can bind the LLC (unless agreement limits this)

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Manager-managed LLC

Best when:
  • Some members are passive investors
  • You want professional management
  • Members have widely varying ownership percentages
  • Complex operations requiring clear management authority
Voting: Members vote on major issues; managers handle operations Authority: Only managers can bind LLC in ordinary course of business
You must specify member-managed or manager-managed on your state filing. Most states default to member-managed if not specified.

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Distribution and allocation provisions

Carefully address how money flows to members:

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Distribution timing

Specify when members receive cash:
1

Tax distributions

Distribute enough for members to pay taxes on LLC income (even if LLC retains rest)
2

Periodic distributions

Define quarterly or annual distribution schedule
3

Special distributions

Allow manager/member vote for extraordinary distributions
4

Reserves

Require maintaining working capital before distributing
LLC members pay tax on LLC profits even if the cash isn’t distributed. Always include tax distribution provisions.

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Profit allocation methods

Common approaches:
  • Pro rata: Proportional to ownership percentage
  • Preferred return: Some members get return threshold before others
  • Carried interest: Managers get profit share beyond capital contribution
  • Tiered: Different allocation at different profit levels

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Transfer and buyout provisions

Protect members with comprehensive transfer rules:
If a member wants to sell:
  • Member gives notice to LLC and other members
  • Other members can buy proportionally at offered price
  • If refused, member can sell to third party
  • Third party may need approval to become member
Prevents unwanted outsiders from joining.
If majority wants to sell entire business:
  • Majority members can require minority to sell
  • All members get same price and terms
  • Protects acquirer who wants 100% ownership
  • Typically requires 75% or more approval
Prevents minority from blocking a good exit.
If majority sells to third party:
  • Minority members can join the sale
  • Must receive same price and terms as majority
  • Protects minority from being left behind
Ensures minority isn’t stuck with new majority owners.
Common mechanisms:
  • Shotgun clause: One member offers price, other must buy or sell
  • Right of first offer: Selling member must offer to LLC/members first
  • Forced buyout: Specific events trigger buyout requirement
  • Valuation method: How to determine price (appraisal, formula, etc.)

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Amending the operating agreement

Change the agreement as your business evolves:
1

Propose amendment

Member drafts specific amendment language
2

Member vote

Obtain required approval (unanimous, supermajority, or per existing agreement)
3

Document amendment

Execute amendment signed by all members
4

Update master agreement

Maintain current version reflecting all amendments
Most operating agreements require unanimous consent to amend. This protects minority members from having their rights changed against their will.

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Common mistakes with operating agreements

Problem: State default rules govern, leading to disputesSolution: Always create operating agreement, even for single-member LLCs
Problem: Members disagree about who owns whatSolution: State exact percentages that total 100%
Problem: Member sells to unwanted third partySolution: Include right of first refusal and approval requirements
Problem: Members owe taxes but LLC doesn’t distribute cashSolution: Require minimum distributions to cover member tax obligations
Problem: Unclear what happens when member leaves or LLC endsSolution: Include specific dissolution triggers and winding-up procedures

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When to update your operating agreement

Review and potentially amend when:
  • Adding or removing members
  • Changing ownership percentages
  • Switching from member-managed to manager-managed
  • Raising outside investment
  • Significantly growing the business
  • Member roles or contributions change
  • Preparing to sell the business

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State-specific requirements

While operating agreements are similar across states, check for:
  • Whether operating agreement is legally required
  • Specific language required by state law
  • Restrictions on certain provisions
  • Publication or filing requirements
Most states don’t require filing the operating agreement with the state - it remains an internal document. A few states (like New York) have special requirements.

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Getting help with operating agreements

Resources for creating your agreement:
  • DIY templates: LegalZoom, Rocket Lawyer, Nolo ($50-200)
  • State resources: Some states provide basic templates
  • OpenLaw: Free automated templates
  • Attorneys: Custom drafting for complex situations ($1,000-3,000)
For multi-member LLCs with unequal ownership or complex arrangements, invest in attorney help. Fixing disputes later costs far more.

LLC formation guide

Complete guide to forming an LLC

Incorporation

Compare LLC with corporation structure

Bylaws

Corporate equivalent of operating agreement

Founder Accord

Pre-formation founder agreement

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