LLC Operating Agreement: What It Is and What to Include

What is an operating agreement and is it required?

An operating agreement is the contract between an LLC's members governing how the company is owned and run. It is internal: in most states you keep it with your records rather than filing it, and the state never sees it.

A handful of states require an LLC to have one, and most do not require it at all. That legal optionality misleads people into skipping it, because the absence of a filing requirement is not the same as the absence of a need.

Without one, your company is governed entirely by your state's default LLC statute - a set of rules written for the average company, which may distribute profits or handle a departing member in ways you would never have agreed to. The agreement exists so that your terms, not the state's defaults, decide what happens.

Why does a single-member LLC need one?

The instinct is that an agreement with yourself is pointless. It is not, for two practical reasons.

The first is evidence of control. In states that allow anonymous ownership - Wyoming, New Mexico, Delaware, Nevada - your name does not appear on the public formation documents. When a bank or payment processor asks how you prove you own the company, the operating agreement is the document that answers. Non-resident founders hit this constantly at account opening.

The second is the liability separation itself. One factor courts weigh when deciding whether to disregard an LLC's separateness is whether the owner treated it as a genuine entity. Having an operating agreement, keeping business funds separate, and documenting decisions all support that. It is cheap evidence that the company was run as a company.

• Banks and processors ask for it, especially in anonymous-ownership states.
• It supports the separation that gives you liability protection.
• It sets your terms instead of the state's default statute.

What should an operating agreement include?

The essential terms are the same whether the company has one owner or five, though multi-owner agreements need considerably more detail on disputes and exits.

• Company details: legal name, formation state, formation date, registered agent and principal address.
• Members and ownership: each member's name and percentage interest, and what they contributed for it.
• Management: whether the LLC is member-managed or manager-managed, and who has authority to sign contracts and spend money.
• Voting: what decisions need a vote, what threshold each needs, and which decisions require unanimity.
• Profit and loss allocation: how profits are split and when distributions are made - which need not match ownership percentages if the members agree otherwise.
• Capital contributions: what happens when the company needs more money, and whether members must contribute.
• Transfers and exits: whether a member can sell their interest, who gets first refusal, and how the interest is valued.
• Death, disability and buyout: what happens to an interest when a member dies or must leave.
• Dissolution: what triggers winding up and how remaining assets are distributed.
• Amendment: how the agreement itself can be changed.

Are free operating agreement templates safe to use?

For a straightforward single-member LLC, a reputable free template is usually a reasonable starting point. The terms are relatively standard, the stakes are contained, and having a competent template beats having nothing at all.

For a multi-member LLC, treat templates with more caution. The clauses that matter most are exactly the ones templates handle worst: what happens when two owners disagree permanently, how a departing member's interest is valued, whether a member can sell to an outsider, and what happens if someone stops contributing. Those terms are cheap to negotiate at the start and extremely expensive to argue about later.

Whatever you start from, make sure it is written for your formation state, that it actually matches how you intend to run the company, and that every member signs and keeps a copy. An unsigned template in a folder is not an agreement.

What is an LLC resolution and how is it different?

A resolution is a record of a specific decision, where the operating agreement is the standing set of rules. The agreement says how decisions get made; a resolution documents one that was made.

Resolutions are commonly used to authorise opening a bank account, appointing or removing a manager, approving a significant contract or loan, admitting a new member, or approving dissolution. Banks frequently ask for a banking resolution naming who is authorised to operate the account.

Keep them with your company records alongside the operating agreement. For a single-member LLC a resolution can be a few sentences signed and dated by you - short, but genuinely useful when a bank or counterparty asks for proof that a decision was properly authorised.