What Is an Operating Agreement?

An operating agreement is a contract between members of an LLC documenting how the organization will be run and how key decisions about the company should be made, such as how compensation is distributed, how essential procedures will work and how the business would like to be taxed.

Operating agreements should indicate which management structure the LLC has chosen and describe the allocation of administrative rights and responsibilities amongst members. Having an LLC’s structural designation and accompanying details documented in writing can be particularly important if and when legal issues or other disputes arise.

Operating agreements don’t need to be filed with a state as articles of organization do. Having an operating agreement is, however, strongly recommended. The operating agreement should be updated as necessary as a company grows. Operating agreements can prove to be particularly important in the event of disputes between members or legal issues. Without one, the company operates according to the default provisions in the state LLC law.

How Do I Create an Operating Agreement?

It’s not recommended to try to write an operating agreement from scratch without a legal background. Instead, follow a free template or step-by-step instructions found online through law libraries or legal help websites, or explore sites with business formation resources such as Legal Zoom or Rocket Lawyer. These offer many services specifically geared toward LLCs including interactive programs providing semi-generic operating agreements based on a series of questions.

LLCs with unique considerations, above-average complexity or more than a couple of members should consider hiring professional legal help. While this is the most expensive option, the cost of starting an LLC is still less than that of a corporation and money spent on securing legal safeguards is typically money well spent.