LLC Operating Agreement and Do You Need One?
You formed your LLC. You filed the Articles of Organization, got your EIN, opened a business bank account, and checked "legal setup" off your list. What you probably didn't do—along with most founders—is draft an operating agreement.
That oversight is quietly causing problems for businesses everywhere. Not right away. Usually at the worst possible time: when a co-founder wants out, when an investor asks to see your governing documents, or when a dispute turns into a lawsuit and the court applies your state's default rules instead of what you and your partners actually agreed to.
An operating agreement is the document that governs how your LLC operates. It is, arguably, the most important legal document your business will ever have. Here's what you need to know.
What an Operating Agreement Actually Does
Think of your operating agreement as the internal rulebook for your company. Where your Articles of Organization tell the state that your LLC exists, your operating agreement tells the world—and more importantly, tells your co-founders, employees, investors, and courts—how it actually works.
A complete operating agreement covers:
Ownership structure: Who owns what percentage of the company, and how ownership interests are calculated and recorded.
Management structure: Is the LLC member-managed (owners run it directly) or manager-managed (a designated manager, who may or may not be an owner, runs it)? Who has authority to make decisions, sign contracts, open bank accounts?
Profit and loss distribution: How and when profits are distributed to members. This doesn't have to be proportional to ownership—operating agreements can specify different distribution arrangements.
Voting rights and decision-making: What decisions require a majority vote? What requires unanimous consent? What can management decide unilaterally?
Capital contributions: What has each member contributed, and what happens if the company needs additional capital later?
Transfer restrictions: Can members sell or transfer their ownership interest freely? What rights do existing members have if someone wants to exit? This is where "right of first refusal" and "tag-along" provisions live.
Member exits and buyouts: What happens when a member wants to leave, becomes incapacitated, dies, or gets divorced? How is their interest valued? Who can buy it?
Dissolution: Under what circumstances does the LLC dissolve, and how are assets distributed?
What Happens If You Don't Have One
Every state has default LLC rules that apply when an operating agreement doesn't address a situation—or when no operating agreement exists at all.
In most states, default rules are not what most multi-member LLCs would choose for themselves. Some examples:
Voting: Many states default to one vote per member, regardless of ownership percentage. If you own 70% and your partner owns 30%, they may have equal voting power on major decisions unless your operating agreement says otherwise.
Profit distribution: Some states distribute profits equally among members by default, not proportionally to ownership.
Management authority: Without a clear operating agreement, it may be unclear who has authority to make binding decisions for the company—a problem when a bank, investor, or counterparty needs to know.
Member exits: Without provisions governing what happens when a member wants to leave, you may have no legal mechanism to prevent them from selling their interest to an outside party you've never met.
Dissolution triggers: Depending on the state, the death or departure of a member may trigger mandatory dissolution of the LLC without an operating agreement specifying otherwise.
These default rules are designed to cover general cases, not your specific business. And when co-founders disagree about what "we agreed to"—which happens more often than anyone expects—the operating agreement is what resolves it. Without one, you're in court arguing over verbal understandings.
Single-Member LLCs Need One Too
Many single-member LLC owners assume they don't need an operating agreement because there's no partner relationship to govern. This is wrong for several reasons.
Banking and financing: Most banks and many lenders require an operating agreement to open a business bank account or process a loan. Even if yours doesn't require it today, you may encounter this requirement later.
Liability protection: One of the primary benefits of an LLC is separating your personal assets from your business liabilities. Courts in many states are more willing to "pierce the corporate veil"—treating the LLC as the same entity as its owner—when there's no operating agreement establishing the LLC as a separate, formal entity.
Investors: If you ever take investment, investors will want to see your governing documents. Not having an operating agreement signals amateur-hour governance and creates cleanup work before any deal can close.
Future changes: You may add partners or employees with equity later. Starting with a well-drafted operating agreement makes that transition far cleaner.
What a Good Operating Agreement Looks Like
Length and complexity scale with the situation. A single-member LLC operating agreement may be three to five pages. A multi-founder LLC with complex equity arrangements and outside investors may need twenty or more.
Regardless of length, a solid operating agreement is written in plain language, covers all the scenarios that could realistically come up, and reflects what the members actually agreed to—not just boilerplate from a form.
Watch out for:
Generic templates that don't reflect your arrangement: A template that defaults to equal ownership and equal voting when you have a 60/40 split is worse than useless—it contradicts your actual agreement and could be used against you.
Missing transfer restrictions: If your operating agreement doesn't address what happens when a member wants to sell their interest, you may have no way to prevent an unwanted third party from becoming your co-owner.
Unclear management authority: Ambiguity about who can make what decisions is one of the most common sources of co-founder disputes. Be specific.
No buy-sell provision: This is the mechanism that governs what happens when a founder wants out or needs to be forced out. Without it, you have no clean exit path.
When to Draft or Update Your Operating Agreement
At formation: The best time to draft your operating agreement is when you form the LLC, before any disputes or changes in circumstances. It's much easier to agree on hypothetical scenarios when everyone is optimistic about the business.
When adding members: Any time a new member joins the LLC, the operating agreement should be amended or restated to reflect the new ownership structure, capital contributions, and any new terms.
Before taking outside investment: Investors will review your operating agreement as part of due diligence. If it doesn't exist or is inadequate, you'll be drafting it under time pressure during a deal process—the worst time to negotiate these terms.
After major changes: Significant changes in the business, its ownership structure, or the relationships between members may warrant updating the agreement.
The Bottom Line
If you have an LLC and no operating agreement, creating one should be near the top of your legal to-do list. If you have a single-member LLC, it protects your liability shield and prepares you for future growth. If you have co-founders, it is the document that governs your most important business relationships and protects everyone involved.
The cost of not having one becomes clear at exactly the moment you can least afford it.
Need an operating agreement? Talking Tree offers attorney-vetted LLC operating agreement templates and AI-powered document drafting so you can get properly documented without a five-figure legal bill. Your co-founder relationship is worth protecting.