When starting a business in the United States, forming an LLC (Limited Liability Company) is a popular option for founders who want simplicity, flexibility, and liability protection. However, one essential document often overlooked in the process is the operating agreement.

An LLC operating agreement defines how your business will be managed, how profits and losses will be distributed, and how decisions will be made. Even if your state doesn't require one, having an operating agreement can protect your startup from internal disputes and external risks — and ensure you, as a founder, stay in control.

In this guide, we’ll walk you through what an operating agreement is, why it matters, and what to include.

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What is an operating agreement?

An operating agreement is a legal document that establishes the internal structure, rules, and responsibilities within an LLC. It outlines ownership percentages, management duties, voting rights, profit distribution, and the process for adding or removing members.

Although an operating agreement is not mandatory in every U.S. state, it plays a crucial role in protecting your business. Without it, your LLC will be governed by the default rules of the state — and those rules may not reflect what you want for your company.

Key elements typically covered include:

• Ownership structure among members
• Member responsibilities and voting procedures
• Profit and loss distribution
• Management structure (member-managed vs. manager-managed)
• Procedures for meetings and voting
• Terms for member departure, buyouts, or death

By setting these terms clearly, an operating agreement helps avoid misunderstandings, internal conflicts, and exposure to personal liability.

Why an operating agreement matters for your startup

Many early-stage founders think operating agreements are unnecessary, especially if they’re launching a single-member LLC or working with a small team. But here’s why every startup should prioritize one:

1. Protect your limited liability status

Without an operating agreement, it might be easier for courts to argue that your LLC isn't truly separate from you as an individual — risking your personal assets. A clear operating agreement reinforces the LLC’s legal independence.

2. Customize the rules to fit your business

State default rules are one-size-fits-all. By creating your own operating agreement, you get to define the rules that work best for your team, your vision, and your way of doing business.

3. Prevent internal disputes

An operating agreement outlines exactly how decisions are made and how disagreements are resolved. It’s much easier to settle issues if everyone agreed to the ground rules from day one.

4. Plan for the future

Your agreement can establish what happens if a founder leaves, passes away, or wants to sell their stake — ensuring the company's continuity isn't threatened by unexpected changes.

5. Improve your fundraising readiness

Investors and partners often look for clear legal structures. Having a professional operating agreement signals that your startup is serious, organized, and investment-ready.

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What to include in your LLC operating agreement

A strong LLC operating agreement should be tailored to your specific business needs. At a minimum, it should include:

• Ownership structure: Define each member's percentage of ownership and contributions.
• Management roles: Specify who manages the LLC and how decisions are made.
• Profit and loss distribution: Set clear rules for how profits and losses will be shared among members.
  Voting rights and procedures: Explain how votes are cast and what thresholds are needed for major decisions.
• Member departure and buyouts: Detail the process if a member wants to leave or transfer their ownership.
• Succession planning: Establish what happens if a member passes away or becomes incapacitated.
• Amendment procedures: Define how the agreement can be updated over time.
  
  

Even single-member LLCs benefit from outlining these points to solidify the separation between personal and business assets.

Do you always need an operating agreement?

In some states — including California, New York, and Missouri — operating agreements are required by law. In others, they're optional but highly recommended. Regardless of legal requirements, every startup can benefit from having one.

Without an operating agreement, your LLC will operate under state default rules. For example, some states automatically require profits to be split equally among members, regardless of initial investment or involvement. An operating agreement lets you define your own, fairer terms.

Ready to protect your startup and customize your business rules? Book a call with our experts to draft a professional operating agreement.

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FAQs about LLC operating agreements

Does a single-member LLC need an operating agreement?

Yes. Even if you're the only member, an operating agreement helps protect your limited liability status, shows professionalism to banks and investors, and defines how your business operates.

Can I amend an operating agreement later?

Yes. Most operating agreements include a procedure for amendments, typically requiring approval by a majority or unanimous vote. Always check your agreement’s specific amendment terms.

How is ownership defined in an operating agreement?

Ownership is typically defined as a percentage based on capital contributions or other agreed terms. It’s critical to clearly document these percentages from the beginning.

What happens if I don't have an operating agreement?

Without one, your LLC will be governed by your state's default rules, which may not align with your intentions for management, ownership, or profit distribution.

Is an operating agreement the same as articles of incorporation?

No. Articles of incorporation (or organization) create the LLC with the state. The operating agreement governs how the LLC operates internally.

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