What Is an Operating Agreement?

An operating agreement is a written document that describes how a limited liability company is owned and managed. It records who the members are, how much each owns, how decisions are made, how profits and losses are shared and what happens when someone joins, leaves or the company closes.

What it usually covers

Typical sections include the company's name and purpose, the members and their ownership shares, each member's contributions, voting and management rules, how profits are distributed, what happens if a member wants to sell or dies and how the company can be dissolved.

Is it required?

Some states require an operating agreement, and others do not. Even where it is optional, it is worth having. It gives the members a clear set of rules, and in a dispute it is the first document everyone looks at. If there is none, state default rules apply, which may not match what the owners intended.

Single-member LLCs

A single owner may think there is nobody to agree with, but a written agreement still helps. It shows that the LLC is a separate entity with its own rules, supports the limited liability the owner formed it for and satisfies banks that ask for it when opening an account.

An example

A student forms a single-member LLC for an online store. The operating agreement states that the student is the only member, how money moves between the student and the company and what happens if the student wants to add a partner later.

Related terms

See limited liability company, registered agent and EIN. For the practical side, read registered agents and operating agreements.