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What Is An Operating Agreement? Do I Need One For My LLC?

An Operating Agreement is a key document for any LLC (Limited Liability Company). It sets the rules for how your business will run and explains who is in charge of what. Even though some states don’t require one, having an Operating Agreement is a smart move that can protect your business and prevent problems in the future.

What Is an Operating Agreement?

An Operating Agreement is a legal document that explains how your LLC will be run. It includes important details like how decisions are made, how profits are shared, and what happens if someone leaves the business or if the business closes. The main point of an Operating Agreement is to give you control over how your company works. Without one, state laws will decide how your LLC operates, which may not suit your needs. 

Why Do You Need an Operating Agreement for Your LLC?

Even if the law doesn’t require an Operating Agreement, it’s a good idea to have one. Here’s why:

  1. Legal Protection: One big reason people choose to start an LLC is to protect their personal property from business debts. An Operating Agreement helps keep your assets safe by showing that the LLC is a separate entity. Without this agreement, courts might treat your business more like a sole proprietorship, putting your personal belongings at risk.
  2. Custom Rules: If your LLC doesn’t have an Operating Agreement, state laws will decide how your business runs. These laws might not be what you want. For example, some state rules may say profits have to be split evenly, even if you’ve invested more money into the business. By creating your agreement, you can set rules that work best for you.
  3. Clear Roles: If your LLC has more than one member, an Operating Agreement helps avoid arguments by laying out each member’s role. It explains who is responsible for making decisions, handling money, and running the daily operations.
  4. Easier Banking and Investments: Many banks will ask for an Operating Agreement before they let you open a business account. Investors might also want to see your agreement before they put money into your company. This document shows that your LLC is well organized. 

Key Parts of an Operating Agreement for LLC

Most Operating Agreements include the following key parts:

  1. Ownership: This section explains who owns the LLC and what share each person has. It also includes how much money each person has invested in the company​.
  2. Management: You’ll need to decide how your business will be managed. There are two options: member-managed LLC, the owners handle all business decisions. In a manager-managed LLC, one or more managers (who may or may not be members) handle day-to-day tasks. 
  3. Profit and Loss Sharing: This part explains how profits (and losses) will be shared among the members. You can choose to split them based on how much each member invested or decide on a different arrangement.
  4. Decision Making: This section explains how decisions will be made. Will all members vote? Will some decisions require a larger majority? This part of the agreement sets the rules for how your LLC will run on a day-to-day basis.
  5. Ownership Changes: If a member wants to leave the LLC or sell their share, the Operating Agreement for LLC will explain how to handle it. This ensures the business can keep running smoothly.
  6. Dissolution: This section covers what happens if the LLC shuts down. It explains how any leftover money or assets will be divided.

Do Single-Member LLCs Need an Operating Agreement?

Many people with single-member LLCs think they don’t need an Operating Agreement, but that’s not true. Even if you’re the only owner, an Operating Agreement can still help you:

  • Separate Personal and Business Assets: An Operating Agreement shows that your LLC is a separate entity from you. This can protect your assets if your business is sued or goes into debt.
  • Bank Requirements: Most banks will ask for an Operating Agreement before they let you open a business account or get a loan.
  • Flexibility: Even if you don’t have other members, this document lets you set rules for how your business will be run. It also covers what happens if you ever add more members.

Should You Write Your Own Operating Agreement or Get Help?

You have two options for creating your Operating Agreement: you can either write it yourself or hire a professional.

  • Writing It Yourself: There are templates online that can help you write your Operating Agreement. This is the cheaper option, but it might not cover all your business’s unique needs​.
  • Hiring a Professional: If you hire a lawyer or use a legal service, they’ll make sure your Operating Agreement covers everything it needs to. This option costs more but gives you peace of mind​.

When Should You Update Your Operating Agreement?

Your business will change over time, and your Operating Agreement should change with it. You should review and update it if you add new members, change how profits are shared, or make other big changes. Be sure to write down how amendments can be made to the agreement and make sure all members agree on any updates.

Conclusion

An Operating Agreement is a vital document for any LLC, whether you have one member or many. It protects your assets, sets clear rules for how your business runs, and makes your LLC more legitimate in the eyes of banks and investors. Even if it’s not required by law, creating an Operating Agreement is one of the best things you can do to ensure your LLC’s success.

If you don’t have one yet, now’s the time to create your Operating Agreement for LLC. You can use online resources or hire a professional to help you create one that fits your business’s needs.

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