Yes, while not always legally required, having an operating agreement for your LLC is highly recommended because it outlines how your business operates and protects your legal and financial interests.
An LLC operating agreement is a foundational internal document that specifies how your limited liability company will be managed, how decisions will be made, how profits and losses are distributed, and how disputes will be resolved. Even in states that do not mandate it, this document serves as legal proof of how your LLC functions, helping to prevent future conflicts and protect your limited liability status.
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States That Require an Operating Agreement
Not every state requires LLCs to create or file an operating agreement, but a few do. For instance, California, New York, Missouri, and Maine all have legal requirements related to operating agreements. In some cases, the law requires that the agreement be in writing, while in others, it can be oral or implied.
Regardless of your state’s requirement, most legal and business professionals advise creating a written operating agreement from the start. If you do not, your LLC will be governed by your state’s default rules-which may not align with your intentions or best interests.
Why an Operating Agreement Is Important
There are several key reasons to create and maintain an operating agreement:
- Clarifies Ownership and Roles: The agreement defines who owns the LLC and what their percentage of ownership is. It also outlines each member’s responsibilities and decision-making authority.
- Prevents Internal Disputes: With clear rules in place, disagreements between members are easier to resolve. Everyone understands their role and how decisions should be made.
- Protects Limited Liability Status: Having an operating agreement reinforces the LLC’s separate identity from its owners, which is essential for preserving liability protection.
- Supports Banking and Legal Needs: Banks and investors often require an operating agreement before opening accounts, issuing credit, or forming partnerships.
- Governs Succession and Exit Plans: It sets clear terms for what happens if a member leaves the business, passes away, or sells their share.
Single-Member LLCs Also Benefit
Even if you’re the sole owner of your LLC, having an operating agreement is still a smart move. It demonstrates that your LLC is a separate legal entity. Courts are more likely to uphold your limited liability protections if you document the formalities of operating a business-one of which is maintaining an operating agreement.
For single-member LLCs, the agreement typically includes provisions related to decision-making, how profits will be withdrawn, and what happens in the event of death or incapacity. These points are just as important to document for a solo operation as for a multi-member LLC.
What to Include in an Operating Agreement
While the specific contents of an operating agreement will vary by business, most include the following sections:
- Basic information about the LLC (name, address, formation date)
- Ownership structure and capital contributions
- Management structure (member-managed vs. manager-managed)
- Voting rights and procedures
- Profit and loss allocations
- Rules for adding or removing members
- Procedures for dissolution
You don’t necessarily need to hire an attorney to draft your agreement, but it’s wise to use a reliable template or formation service to ensure all essential details are covered. If your LLC has multiple members or complex ownership arrangements, legal guidance can help avoid future pitfalls.
What Happens Without One?
If you don’t create an operating agreement, your state’s default LLC rules will apply by default. These generic rules may not reflect your intentions, especially when it comes to decision-making authority, profit-sharing, or succession planning. You also leave yourself open to misunderstandings with partners or co-owners, which can lead to expensive disputes later.
Without a written agreement, your LLC’s internal operations may appear less legitimate, which could impact your ability to secure funding, resolve legal matters, or maintain liability protection.
IRS and Legal Recognition
Although the IRS does not require operating agreements to issue an EIN, they may request a copy in audits or disputes to verify how your LLC reports income, distributes profits, or allocates tax responsibilities. Having this document ready and up to date is a proactive way to protect your business’s standing.
Creating an operating agreement is one of the smartest moves you can make when forming an LLC. It solidifies your business’s internal structure, helps avoid future disputes, and proves that your company operates as a legitimate legal entity. Whether you’re running a solo venture or a multi-partner operation, taking the time to draft and sign this document is a valuable investment in your business’s long-term stability and success.
