Operating Agreement Definition

Operating Agreement Definition

An operating agreement is a document that clearly outlines an LLC’s rules and structure. It’s one of the most important documents for your LLC. The operating agreement can detail:

• The names of any managing members
• Monetary investment requirements for members
• Ownership percentages and equity distributions
• Voting rights of members
• Events causing dissolution of the LLC

Every LLC’s operating agreement will be different and can range in length depending on the detail it provides. The main purpose is to have a set of rules as a guideline for the LLC’s operation. Whether your LLC’s operating agreement is one page or 20, there are clear benefits to having a well-constructed operating agreement.

Operating Agreement Benefits

As your LLC scales and grows, an operating agreement will articulate the business rules of the company. Additionally, if your business dissolves, your operating agreement can help you determine how to split its assets.

Another operating agreement advantage is that it can be written to establish the rights and responsibilities of each member or manager of the LLC. In the event of a dispute, the operating agreement can help determine the appropriate resolution.

Operating Agreements Considerations 

 LLC terminology is different from terminology used in other businesses, like corporations. An LLC can be “member-managed” or “manager-managed.” A member-managed LLC is operated by all members or owners. Meanwhile, a manager-managed LLC is run by designated managers who can either be LLC members or hired employees. 

An operating agreement serves an important role in defining and limiting the authority of an LLC’s managers. It can also outline the compensation managers receive for their services.

Are operating agreements required to form an LLC?

Contrary to what you may think, an operating agreement isn’t usually required to form an LLC. Operating agreements are optional in most states, although they are legally required in some (like California, Delaware, Maine, Missouri, and New York).

If you opt out of having an operating agreement for your business, then your LLC will be governed by the law that your state has adopted regarding things like LLC dissolution and equity splits. Depending on your state’s laws and the specifics of your business, relying on the default LLC laws may be a disadvantage for your LLC.

Operating Agreement Template Service

Not sure what to include in your operating agreement? We can help you figure out how to create an operating agreement. Whether you have experience drafting an operating agreement or not, you can benefit from using our template to get started. We are committed to assisting you with building a solid structure for your LLC.