No, most states do not legally require an operating agreement-but having one is strongly recommended. An operating agreement protects your LLC’s structure, defines how it operates, and can help prevent internal disputes or legal trouble down the road.
Whether you’re starting a single-member LLC or launching a multi-owner business, an operating agreement is one of the most important documents you can create-even if your state doesn’t mandate it. It outlines how your LLC will be managed, how profits and losses are handled, and what happens if a member leaves or the business dissolves.
Contents
1. What Is an Operating Agreement?
An operating agreement is a formal, written document that sets the rules for how your LLC functions. It’s like a user manual for your business. It covers topics such as:
- Ownership structure
- Member roles and responsibilities
- How profits and losses are distributed
- Voting rights and decision-making procedures
- How new members can join or existing ones can exit
- Steps for dissolution or sale of the business
Once signed, the operating agreement becomes a binding contract among the LLC’s members, even if it’s not filed with the state.
2. Is It Legally Required?
Most states do not require LLCs to have an operating agreement. However, a few states (like California, New York, and Missouri) do require one, especially for multi-member LLCs-even if you’re the only one managing the business.
Regardless of legal obligation, creating an operating agreement is one of the smartest steps you can take to legitimize your LLC.
3. Why You Need One-Even as a Solo Owner
Many single-member LLC owners skip the operating agreement, assuming it’s unnecessary. But having one offers multiple protections:
- Maintains your limited liability by showing the LLC is a separate legal entity
- Reinforces your professional image when dealing with banks or potential partners
- Clarifies what happens to the business if you become incapacitated or pass away
- Prevents state default rules from taking control if no agreement is in place
Without a written agreement, your LLC will be governed by your state’s default rules, which may not align with your intentions or best interests.
4. For Multi-Member LLCs: It’s Essential
When your LLC has more than one owner, the operating agreement becomes even more important. It helps prevent misunderstandings and conflicts by clearly outlining:
- Who owns what percentage of the business
- How much each member contributes (money, time, assets)
- How profits, losses, and responsibilities are divided
- What happens if a partner wants to leave or sell their share
- How disputes are resolved internally
Without these terms in writing, you’re vulnerable to legal disputes and financial headaches that could disrupt or even destroy the business.
5. What Happens Without an Operating Agreement?
If your LLC operates without an operating agreement, your state’s LLC laws serve as the default rules. This means:
- Each member may be treated as having equal rights, regardless of contributions
- You may be required to split profits equally, even if one person did all the work
- Decisions may require unanimous consent rather than majority vote
These outcomes are often undesirable, and once a conflict arises, it may be too late to draft an agreement that everyone agrees to retroactively.
6. Can You Write It Yourself?
Yes. You can draft your own operating agreement using templates or online tools. Just make sure it’s tailored to your specific business, and not just a generic form. At a minimum, it should include:
- Business name and address
- Member names and ownership percentages
- Management structure (member-managed or manager-managed)
- Rules for voting, meetings, and decision-making
- Procedures for adding or removing members
- Dissolution procedures
For complex situations-such as outside investors, profit-sharing arrangements, or high-value assets-it’s wise to consult a business attorney.
While not always required, an operating agreement is a foundational document that strengthens your LLC’s credibility, reduces legal risks, and gives you more control over how your business runs. Whether you’re on your own or working with partners, taking the time to write one now can save you serious trouble later.
