What Is an LLC Operating Agreement (and Do You Need One)?
An operating agreement is the foundation of your LLC. Learn what it is, why you need it, and how it protects your business and personal assets.
What Is an LLC Operating Agreement?
Definition
An operating agreement is a legal document that outlines how your LLC will be managed, operated, and governed. Think of it as your LLC's rulebook.
While not always required by state law, it's essential for protecting your limited liability and establishing clear business procedures.
Why You Need It
- Protects your limited liability status
- Establishes clear ownership structure
- Defines profit and loss distribution
- Provides dispute resolution process
Key Sections of an Operating Agreement
Member Information
Details about who owns the LLC and their ownership percentages. This is crucial for tax purposes and legal protection.
What to Include:
- • Names and addresses of all members
- • Ownership percentages
- • Initial capital contributions
- • Member roles and responsibilities
Management Structure
Defines how decisions are made and who has authority to act on behalf of the LLC. This prevents confusion and disputes.
Management Types:
- • Member-managed (all members participate)
- • Manager-managed (appointed manager)
- • Voting rights and procedures
- • Decision-making thresholds
Key Decisions:
- • Major business decisions
- • Financial commitments
- • Adding new members
- • Dissolution procedures
Financial Provisions
Outlines how money flows through your LLC, including profit distribution, capital calls, and financial record keeping.
Profit/Loss Distribution:
- • How profits are divided
- • Loss allocation methods
- • Distribution timing
- • Tax considerations
Financial Management:
- • Banking and accounting
- • Capital contribution requirements
- • Financial reporting
- • Audit procedures
Transfer and Dissolution
Defines what happens when members want to leave, sell their interest, or when the LLC needs to be dissolved.
Transfer Provisions:
- • Right of first refusal
- • Valuation methods
- • Approval requirements
- • Buyout procedures
Dissolution Process:
- • Triggering events
- • Asset distribution
- • Debt settlement
- • Final tax filings
Do You Need an Operating Agreement?
Yes, You Need One If:
- You want to protect your limited liability
- You have multiple members
- You want clear business procedures
- You plan to add partners later
- You want to avoid state default rules
You Don't Need One If:
- You're okay with state default rules
- You don't mind potential disputes
- You're okay with unclear procedures
- You don't plan to add partners
- You're comfortable with legal risks
Benefits of Having an Operating Agreement
Legal Protection
Courts are more likely to respect your limited liability if you have a proper operating agreement in place.
Clear Procedures
Establishes clear rules for decision-making, profit distribution, and dispute resolution.
Financial Clarity
Defines how money flows through your business and prevents financial disputes.
How to Create an Operating Agreement
Option 1: Use a Professional Service
Services like Start With Genie provide comprehensive operating agreements tailored to your specific needs and state requirements.
Benefits:
- • State-specific compliance
- • Professional legal language
- • Comprehensive coverage
- • Ongoing support
Option 2: DIY Templates
You can find templates online, but be careful. Generic templates may not address your specific needs or state requirements.
Risks:
- • May not be state-specific
- • Could miss important provisions
- • Legal language may be unclear
- • No professional review
Option 3: Attorney Drafted
For complex situations or multiple members, consider having an attorney draft your operating agreement.
When to Use:
- • Multiple members
- • Complex ownership structure
- • Significant assets
- • Unique business needs
Cost Considerations:
- • Attorney fees: $500-$2,000
- • Ongoing legal support
- • Custom provisions
- • Professional review
How Start With Genie Helps You Get the Right Operating Agreement
Comprehensive Agreement
We provide a complete operating agreement that covers all essential provisions for your LLC.
Legal Protection
Our agreement helps protect your limited liability and establishes clear business procedures.
Included in $49
The operating agreement is included in our flat $49 rate, with no additional fees or upsells.
Ready to form your LLC with a proper operating agreement? Our step-by-step setup guide shows you exactly what to do.