When starting an LLC, most business owners focus on setting up operations and attracting customers. But without an operating agreement, you could be leaving your business vulnerable to internal disputes and legal complications.
Imagine you and a friend decide to open a bakery together. You both invest money, split responsibilities, and get to work. Business is booming—until you disagree on how profits should be shared, who has the final say on hiring, or what happens if one of you wants out. Without an operating agreement, you’re left guessing, and legal battles could follow.
An operating agreement is like a prenup for your business—nobody wants to think about worst-case scenarios, but without one, things can get messy fast. It spells out who owns what, how decisions get made, and what happens if disagreements arise. Even in states where it's not legally mandated, having one is like putting on a seatbelt—you hope you won’t need it, but you'll be glad it’s there if things take an unexpected turn.
What is an operating agreement?
A good operating agreement covers all the bases—it protects your money, your ownership rights, and your sanity. This legally binding document lays out who owns what, how decisions get made, and what happens when things don’t go as planned.
By formalizing these details, an operating agreement distinguishes an LLC from sole proprietorships and general partnerships, reinforcing the limited liability protection that makes an LLC so appealing in the first place. Similar documents exist for other business structures—like partnership agreements for partnerships and corporate bylaws for corporations—but for an LLC, this is your safety net.
| 🏢 Learn more about the different types of business structures. |
What are the key components of an operating agreement?
While each operating agreement is tailored to the specific needs of the business, common elements include:
- Ownership Structure: Who owns what? This section breaks down the percentage of the company each member owns—so no one’s claiming they own 51% when it’s really 10%.
- Management & Decision-Making: Is this a democracy, a dictatorship, or something in between? This determines whether the LLC is managed by its members or by an appointed manager.
- Profit & Loss Distribution: Nobody starts a business to argue over money—this section lays out how profits and losses are split so everyone knows what to expect.
- Voting Rights & Dispute Resolution: Even the best business partners disagree. This part establishes protocols for making significant decisions and resolving internal conflicts before things spiral.
- Exit Strategies & Succession Planning: What happens if a member wants to leave, sell their stake, or (unfortunately) passes away? Planning for this now saves headaches later.
Do I NEED an operating agreement?
While not all states require LLCs to have an operating agreement, having one is highly recommended.
- LLCs: In some states, like California or New York, it’s not just a recommendation—it’s the law. But even if it's not required in your state, it's better to have one than to go without.
- Single-Member LLCs: If you’re the only owner, you might wonder why you need a formal agreement with yourself. Here’s the deal—having one helps maintain the separation between your personal and business assets, reinforcing your liability protection. Plus, if you ever take on investors or partners, you won’t have to scramble to put something together later.
- Multi-Member LLCs & Partnerships: When more than one person is involved, assumptions lead to conflicts. An operating agreement ensures everyone is on the same page about who does what, how profits and losses are divided, and how disputes get resolved—before things get complicated.
- Corporations: Corporations don’t use operating agreements, but they have their own versions, such as bylaws and shareholder agreements, to keep things running smoothly.
What are the legal and practical benefits of having an operating agreement?
Implementing an operating agreement offers several advantages:
- Protects Your Limited Liability Status: Think of this as proof your business is separate from your personal finances. Without one, courts might assume otherwise, putting your personal assets at risk.
- Prevents Internal Disputes: Nothing sours a business partnership faster than an argument over money or decision-making. Clear guidelines keep everyone on the same page and prevent drama.
- Enhances Professionalism & Credibility: Banks, investors, and business partners don’t just take your word for it—they want to see the paperwork. Having an operating agreement shows you’re running a legitimate operation.
- Gives You Control Over Business Operations: If you don’t have an operating agreement, state laws dictate how your business runs—and trust us, those laws weren’t written with your specific business in mind.
The bottom line
An operating agreement is more than just a formality; it's a critical tool for protecting your LLC and ensuring smooth operations. Even if not legally required, it offers a clear framework for management, ownership, and dispute resolution. It's advisable to consult with a legal professional to draft an operating agreement that aligns with your specific business needs.
If you're forming an LLC or currently operate one without an operating agreement, consider taking action now. Whether drafting one yourself or seeking professional assistance, ensuring this document is in place can safeguard your business's future.
Need assistance with your operating agreement? Schedule a free consultation with a DiMercurio Advisors team member today to ensure your business is properly protected.
