What Is an Operating Agreement? A Comprehensive Guide
You and your business partner are excited—until the money hits the bank and you realize you never talked about who gets what. Now it’s awkward. Or worse—messy. That’s what happens when you skip an operating agreement.
If you’re building an LLC—or already have one—it’s time to get clear. Guessing games don’t cut it when things get complicated. Let’s walk through what an operating agreement is, what it does, and why you need one before things go sideways.
What Is an Operating Agreement?
An operating agreement is the rulebook for your LLC. It lays out who owns what, how decisions get made, how money flows, and what happens if someone wants out—or messes up.
If you're the only owner, it’s still worth having. Without one, the state’s default rules apply—and those rarely reflect how you want to run things.
Think of it like this: an LLC gives you legal protection, but the operating agreement gives you structure and control. It keeps your business relationships clean, your expectations clear, and your future way more predictable.
Articles of Organization vs. Operating Agreement
These two get confused all the time—but they’re not the same thing. You need both. The articles of organization form your business. The operating agreement helps you run it on your terms, not the state’s default settings.
Articles of Organization are what you file with the state to create your LLC. It’s the paperwork that makes your business official in the eyes of the law.
Operating Agreement is the internal document that explains how your LLC works—who owns it, who makes decisions, how profits are split, and what happens if someone leaves.
Types of Business Entities That Require Operating Agreements
Operating agreements are primarily for LLCs—but not all LLCs look the same. If you’re a single-member LLC, you still need one. It proves you’re running a legit business, not just a side hustle, and it helps protect your personal assets if things go sideways.
If you’re a multi-member LLC, it’s non-negotiable. Without an agreement, you’re opening the door to confusion, conflict, and the state stepping in to make decisions for you.
Partnerships and joint ventures also benefit from similar internal agreements—even if they’re not called “operating agreements.” Anytime you’re sharing ownership, put it in writing. Always.
Provisions of Operating Agreements
Your operating agreement should cover more than just ownership—it should spell out how your business runs. Here’s what to include:
Ownership Percentages: Who owns how much, and how those shares are divided.
Voting Rights and Decision-Making: How major (and minor) decisions get made.
Profit and Loss Allocation: How money is distributed (or reinvested).
Member Roles and Responsibilities: Who’s doing what—and what they’re accountable for.
Capital Contributions: Who’s putting in money, time, or other resources to get started.
Transfer of Ownership: Explains what happens if someone wants to sell, leave, or dies.
Dispute Resolution: How disagreements are handled before they explode.
Dissolution Terms: The plan for winding things down if it ever comes to that.
Operating Agreement Example
Let’s say you and your business partner each own 50% of a branding studio. You bring in clients. She handles creative. You split profits down the middle. But what happens when one of you wants to hire help, or take a bigger draw one month? What if one of you stops pulling your weight?
Your operating agreement could include:
Each member owns 50%
All major decisions require unanimous consent
Profits are distributed quarterly, based on ownership
Either partner can propose hiring, but both must approve
If one member exits, the other gets first buyout rights
That’s a basic version, but it gives you a roadmap for how things work, so you’re not making it up in the middle of a fight.
Benefits of an Operating Agreement
Having an operating agreement isn’t just a legal formality—it’s a smart, proactive move that protects you and your business from the inside out.
#1: Clarifies Ownership and Roles
It spells out who owns what and who’s responsible for what. No guessing. No, “I thought we agreed.” Just clarity.
#2: Prevents Disputes
When expectations and processes are written down, there’s less room for misunderstandings—or messy conflict when things get tense.
#3: Protects Limited Liability Status
An official operating agreement helps prove you’re running a real business, not a hobby. That matters if you ever need to defend your personal assets.
#4: Outlines Profit Distribution
It explains how and when profits are shared. That way, nobody gets caught off guard when it’s time to pay or reinvest.
#5: Sets Exit and Dissolution Terms
If someone wants out or if the business winds down, the agreement provides a plan. It keeps you from scrambling in high-stress moments.
#6: Builds Credibility With Banks and Investors
Banks and potential partners want to see structure. A solid operating agreement shows you’ve got your business act together.
#7: Gives You Control Over How the Business Runs
Without it, state laws decide for you. With it, you get to run your business on your terms—not by default.
How To Establish Operating Agreements
Creating an operating agreement doesn’t have to be complicated. But it does have to be clear, thorough, and tailored to your business. Here’s how to do it right.
Step #1: Decide Who’s Involved
List all members of your LLC and confirm their ownership percentages. Everyone who has a stake in the business should be part of the agreement.
Step #2: Outline Key Terms
Include core details like member roles, voting rights, profit distribution, capital contributions, and what happens if someone exits the business.
Step #3: Talk Through the “What-Ifs”
What if someone wants to sell their share? Gets sick? Wants to take a sabbatical? Planning for those moments now saves conflict later.
Step #4: Put It in Writing
Don’t rely on a handshake. Use clear, plain language. You can start with a template, but your agreement should reflect your specific business dynamics.
Step #5: Review With an Attorney
This is where you get it airtight. An attorney can flag issues, tighten up the language, and make sure your agreement does what you think it does.
Step #6: Sign and Store It
Once everyone’s on board, sign the agreement and keep a copy where all members can access it. It’s a living document—so revisit it when things shift.
What Is an Operating Agreement: Frequently Asked Questions
What is the purpose of an operating agreement?
The purpose of an operating agreement is to define how an LLC is owned, managed, and structured. It outlines key details like member roles, profit distribution, voting rights, and procedures for resolving disputes or exiting the business.
How do I get an operating agreement for my LLC?
You can create an operating agreement using a legal template or by working with a business attorney to draft one tailored to your LLC. Once written, all members should review, sign, and store the document for reference and legal protection.
Do I really need an operating agreement for my LLC?
Yes, even if you're a single-member LLC. An operating agreement protects your personal liability, proves your business is legitimate, and helps prevent future misunderstandings or legal issues—even if the state doesn't require it.
Are LLC agreement and operating agreement the same thing?
Yes, “LLC agreement” and “operating agreement” refer to the same document. Both terms describe the internal contract that governs how your limited liability company runs and who has authority over what.
Protect Your Business From the Inside Out—Write the Right Agreement With Melissa Wick
Operating agreements aren’t just for the big guys. They’re for real businesses—like yours—that want clarity, protection, and control. Melissa Wick helps small business owners cut through the legal noise and create agreements that match how they run things. Ready to make it official (and smart)? Work with Melissa to put a rock-solid operating agreement in place—so you can stop worrying about “what ifs” and start building with confidence.