Operating Agreement: What It Is, What It Includes, and How to Keep It Under Control

When you form an LLC, the articles of organization get filed with the state. But the real rulebook for your business lives in an internal document most founders overlook until a dispute, bank application, or investor question forces the issue. That document is your operating agreement.

This guide explains what an operating agreement is, why every LLC needs one (even single-member companies), what it should include, how to create one properly, and what happens when you skip it. More importantly, we’ll cover how to keep your operating agreement current, accessible, and working for you as your business evolves with an AI-powered contract lifecycle management platform like HyperStart.

Let’s start with the fundamentals.

What is an operating agreement?

A limited liability company operating agreement is an internal contract among LLC members that defines ownership structure, management responsibilities, member rights, and day-to-day operating procedures. Unlike articles of organization that you file with the state, this is a private document that governs how your business contract actually operates.

It applies to both multi-member and single-member LLCs. Even where state law doesn’t require one, banks, investors, and courts expect to see a written operating agreement that proves your LLC functions as a real business entity separate from its owners.

Here’s what an operating agreement does at a glance:

• Creates an internal agreement between LLC members, defining who owns what percentage and who makes which decisions
• Covers how profits and losses are allocated, voting rights, member roles, and procedures for when someone joins, leaves, or gets bought out
• Helps prove the LLC is a separate legal entity from its owners, which is critical for maintaining limited liability protection

For example, a simple LLC operating agreement example might involve a two-member LLC with a 70/30 ownership split that documents profit distribution, voting rights, and exit procedures.

Why does every LLC need an operating agreement?

Many states don’t formally require an operating agreement for LLCs. This leads founders to ask, “do I need an operating agreement for my LLC?” or “is an operating agreement required for an LLC?”

The legal community is clear on this point:

The better question isn’t whether it’s legally mandatory. It’s whether you want to protect your personal assets, avoid disputes, and present a credible business to banks and investors. An operating agreement delivers all three, regardless of what your state’s minimum requirements say.

Here are four reasons every LLC should have a written operating agreement.

1. Protecting members’ personal liability

The LLC structure exists to separate business liabilities from members’ personal assets. But that liability shield weakens when you don’t treat the business as truly separate. Courts look at whether you maintained separate bank accounts, kept proper records, and operated under documented governance rules.

A single-member LLC operating agreement is especially crucial for solo founders. Without one, the business can look like an “alter ego” of the owner rather than a distinct entity. If a creditor or plaintiff argues successfully that the LLC is just a shell, they can “pierce the veil” and go after personal assets.

Documentation matters. An operating agreement is part of the governance structure that proves you’re running a real business, not just operating under an LLC label. It reinforces the general release of liability protections, the LLC structure is designed to provide.

2. Proving a clear separation between owners and the business

Beyond liability protection, separation matters for taxes, banking, and regulatory compliance. Your operating agreement works alongside other separation practices like a dedicated business bank account, a separate EIN, and distinct financial records.

When comparing articles of organization vs operating agreement, remember that articles are your public filing that creates the LLC. The operating agreement is your internal rulebook that shows how the business operates day-to-day. Together, they demonstrate to banks, tax authorities, and courts that you’re running a legitimate, organized business.

Banks often won’t open business accounts without seeing an operating agreement. The IRS expects single-member LLCs to maintain documentation supporting their tax treatment. Documented governance isn’t just paperwork; it’s evidence of a real business structure.

3. Avoiding internal disputes with written governance rules

Disputes in multi-member LLCs typically involve profit distributions, reinvestment decisions, workload imbalances, bringing in new members, or selling the business. Without clear rules, these disagreements turn into “he said, she said” situations where memories differ and frustration escalates.

A well-drafted LLC operating agreement provides a pre-agreed reference point. When two 50/50 members disagree on whether to distribute profits or reinvest them, the operating agreement specifies the voting threshold required and the distribution schedule that applies. When disputes do arise, having documented rules reduces the need for costly mediation or litigation.

Consider a scenario where one member wants to bring in a third partner, but the other objects. Without an operating agreement, this becomes a contentious negotiation. With one, the admission process and voting requirements are already documented, and if the vote doesn’t go the way someone hoped, the breach of contract disputes are at least grounded in agreed-upon terms rather than assumptions.

4. Creating investor-ready and bank-ready documentation

Banks commonly request an operating agreement before opening business accounts or extending credit lines. They want to verify who has authority to bind the LLC, how ownership is structured, and what restrictions exist on transferring interests.

Investors and acquisition teams ask for operating agreements during due diligence. They need to see ownership percentages, understand what approval rights exist, and verify that there are no hidden transfer restrictions or unusual voting arrangements that could complicate their investment or purchase.

An operating agreement turns these requests from obstacles into quick checkbox items. Instead of scrambling to create documentation during a financing round or sale process, you hand over a clean, professional document that accelerates the deal. Operating agreements signal governance maturity, which matters when other parties are deciding whether to do business with you.

What should an operating agreement include?

Most LLC operating agreements cover who owns what, who manages what, how money flows, and what happens when circumstances change. These fundamental categories apply whether you’re drafting a simple 10-page agreement or a complex 40+ page document:

Let’s examine each area in detail.

1. Ownership structure, capital contributions, and profit distribution

Your operating agreement must be explicit about who the members are, what percentage each owns, and whether there are different classes of membership interests. Document initial capital contributions (what each member put in) and how future contributions will work, distinguishing loans to the LLC (debt that must be repaid) from equity contributions (ownership stakes).

Profit and loss allocations don’t have to mirror ownership percentages, but they must be clearly stated. One member might own 40% but be allocated 50% of profits for doing more operational work. Many founders start with a sample operating agreement template, but these sections typically need customization to fit your specific LLC economics. Understanding the core elements of a contract helps ensure your operating agreement is both valid and enforceable.

2. Management model and voting rights (member-managed vs manager-managed)

LLCs can be member-managed or manager-managed. In a member-managed structure, all members participate in daily management and major decisions. In a manager-managed structure, one or more managers (who may or may not be members) run the business, while members vote only on specifically reserved matters.

Your operating agreement defines which model you’re using and what decisions require member approval versus manager authority. Typical reserved matters for member votes include admitting new members, dissolving the LLC, selling substantially all assets, amending the operating agreement, or taking on major debt.

Voting thresholds matter as much as the list of reserved matters. A simple majority (more than 50%) works for routine decisions. Supermajority thresholds (66.67% or 75%) protect minority members on major actions. Unanimous consent requirements give every member veto power but can create gridlock.

The operating agreement should clarify whether votes are based on ownership percentage, per-capita (one member, one vote), or some hybrid approach. It should also address how votes can be cast (in-person meetings, written consent, electronic approval) and what notice members receive before decisions are made.

3. Rules for adding, removing, and buying out members

Membership changes trigger contentious issues in LLCs. Your operating agreement should address admitting new members (typically requiring existing member approval), voluntary exits (retirement, moving on), and involuntary departures (death, disability, bankruptcy, misconduct).

Buyouts raise three critical questions: valuation (formula, appraisal, or combination), timing (immediate payment or installments), and funding (company redemption or member purchase). A multi-member LLC operating agreement might include drag-along and tag-along rights that force or allow minority members to participate when a majority decides to sell.

4. Dispute resolution, deadlock mechanisms, and dissolution terms

Even with clear rules, disputes happen. Your operating agreement should include a dispute resolution path that escalates from negotiation to mediation to arbitration or court litigation. Deadlock mechanisms matter for 50/50 LLCs where no party has a clear majority, such as giving one member a casting vote or triggering buy-sell provisions.

Dissolution provisions specify what events cause the LLC to wind up: unanimous member consent, passage of a specified time, bankruptcy, or unlawful continuation. The agreement should outline paying debts first, then distributing remaining assets to members. Including an arbitration clause can prevent costly litigation and keep conflicts out of public court records.

5. Tax classification, allocations, and financial reporting

LLCs have tax flexibility. The IRS confirms this treatment:

This “disregarded entity” status means profits flow through to your personal return, but it doesn’t mean you can ignore formality. A multi-member LLC is usually taxed as a partnership with pass-through income. Some elect S-corporation status for tax advantages. Your operating agreement should note the tax classification and clarify how capital accounts are maintained to track each member’s equity.

Financial reporting responsibilities should be spelled out: who maintains books, what information members can access, and whether annual audits occur. These administrative details prevent conflicts when tax time arrives or when members feel shut out of financial information.

How can you create an operating agreement for your LLC?

You have three paths: start from a template and customize it, use an online legal service, or hire an attorney for a custom agreement. The right choice depends on your LLC’s complexity, member relationships, and risk tolerance. You’re making tradeoffs between speed, cost, and customization at every step.

Step 1: Decide whether to start from a template or from scratch

An operating agreement template can work for straightforward ownership, no outside investors, and members who generally agree on operations. Templates provide structure and legal language to modify. The risks include missing state-specific requirements, omitting critical clauses, and creating misaligned rights. Generic templates often fail to account for non-equal contributions, different member roles, or industry-specific considerations.

Here’s how the options compare:

Most LLCs land somewhere in the middle: start with a quality paid template, customize it for your specific terms, then have an attorney review the final draft before signing. This balances cost, speed, and customization.

Step 2: Collect ownership, governance, and tax details from all members

Before drafting, make sure all members are aligned on fundamentals. Trying to document terms while members still disagree about ownership, management, or distributions creates a document no one will follow.

Have conversations where you work through these details:

• Member names and intended ownership percentages for each
• Initial and planned future capital contributions from each member
• Whether profits will be distributed regularly or mostly reinvested, and how that decision gets made
• Preferred management structure (member-managed vs manager-managed) and what decisions require member votes
• Basic tax treatment and whether you’ll elect S-corporation status

This groundwork makes creating an operating agreement for LLC much faster because you’re documenting agreements that already exist rather than trying to negotiate terms inside a legal document. When members leave this meeting with different understandings, your operating agreement becomes a source of conflict rather than a tool for avoiding it.

Step 3: Involve a lawyer for review and state-specific requirements

Even if you start from a template, involving an operating agreement lawyer is strongly recommended when you have multiple members, outside investors, multiple classes of membership interests, or operations in multiple states. These situations introduce complexity that generic templates don’t handle well.

A lawyer can ensure your terms comply with your state’s LLC statute, align with industry norms, and don’t create unintended tax consequences. They’ll flag provisions that sound reasonable but are unenforceable in your jurisdiction, or that create legal ambiguities that will cause expensive disputes later.

To keep costs manageable, provide your lawyer with a draft document plus a clear list of objectives and specific questions. Asking them to “review our operating agreement” without context leads to generic feedback and higher bills. Asking them to “confirm our 75% supermajority threshold is enforceable in Delaware, review our buyout valuation formula, and flag any tax issues with our distribution schedule” gets focused, valuable input at a lower cost.

Even for straightforward single-member LLCs, a one-hour consultation to create an operating agreement for an LLC can help you avoid issues that would cost ten times as much to fix later.

Step 4: Finalize, sign, and store your operating agreement properly

Once the terms are set and any legal review is complete, all members should sign the operating agreement. In a manager-managed LLC, managers typically sign as well to acknowledge their duties and authority. Date the agreement and any attached schedules or exhibits.

Notarization isn’t always required, but it adds evidentiary weight if you ever need to prove the document’s authenticity in court or to a third party. Some banks prefer or require notarized operating agreements.

Produce a clean “golden copy” that everyone agrees is the final, complete version. This becomes your master document that all members (and your lawyer, accountant, and key advisors) reference. Avoid the common mistake where different members have different versions with different handwritten edits. Understanding legal signatures requirements ensures your operating agreement is properly executed and enforceable.

If you started from an LLC operating agreement form (template), make sure your customization didn’t leave behind template language that doesn’t apply to your business. Nothing undermines confidence in your governance like an operating agreement that references provisions you deleted or includes placeholder text you forgot to replace.

Step 5: Document a simple process for future changes

Your operating agreement should include an “Amendments” section that specifies how changes are proposed, what level of member approval is required (simple majority, supermajority, unanimous), and how amendments are documented and communicated to all members.

You have two options for making changes: standalone amendments that modify specific sections, or fully amended and restated agreements that incorporate all changes into a clean, updated document. Standalone amendments work well for minor updates, but after three or four amendments, most LLCs find it easier to create a restated agreement that everyone can read without cross-referencing multiple documents.

Legal document version control matters more than most founders realize. When your third amendment references “Section 4.2 as amended by Amendment No. 1,” you’ve created a compliance headache. Plan for a clean amendment process from the beginning, ideally in a system where the current version is always obvious and previous versions remain accessible for reference.

Operating agreements aren’t set-it-and-forget-it documents. Let’s examine what happens when you don’t have one at all.

What happens if your LLC doesn’t have an operating agreement?

Choosing not to create an operating agreement LLC means you’re governed by your state’s default LLC statutes and by whatever informal understandings exist among members. In practice, this creates three major problems.

If you’re still wondering, “Do I need an operating agreement for my LLC?”, consider what you’re giving up by skipping this step.

1. Default state rules controlling your LLC by default

State LLC statutes include fallback provisions that apply when your operating agreement doesn’t address something. The problem is that these defaults rarely match what members actually want or expect.

In many states, default rules assume equal voting rights and equal profit/loss allocations regardless of capital contributions. If one member put in $100,000 and another contributed $10,000, but you have no operating agreement, the state may treat them as 50/50 owners with equal votes and equal distributions. This clearly doesn’t match the economic reality of the arrangement.

Default rules may also make it difficult to remove a problem member, require unanimous consent for ordinary business decisions, or automatically dissolve the LLC when one member leaves. These provisions might sound protective, but they often create gridlock and frustration. An operating agreement for an LLC lets you override these defaults with rules that actually fit your business.

2. Higher risk of member disputes and stalled decisions

Without a written operating agreement, disputes about strategy, distributions, or bringing in new members escalate quickly because there’s no documented agreement to fall back on. One member remembers a conversation one way, another remembers it differently, and there’s no objective reference point.

These disputes don’t just strain relationships. They stall decision-making when the business needs to act quickly, waste time in unproductive arguments, and often lead to expensive mediation or litigation. Legal costs pile up fast when lawyers have to reconstruct what the parties intended from emails, text messages, and conflicting testimony rather than reading clear terms in an operating agreement.

Even when members initially get along well, circumstances change. Someone’s financial situation shifts, and they want distributions, while others want to reinvest. Someone isn’t pulling their weight operationally but expects equal profits. Someone wants to bring in a friend or family member as a new member. Without an LLC operating agreement establishing how these decisions get made and what rights members have, every disagreement becomes a negotiation that can threaten the business. Contract dispute resolution becomes much more complicated and expensive without clear governing terms.

3. Banking, investor, and due diligence red flags

Banks, investors, and potential acquirers expect to see a limited liability company operating agreement during their evaluation process. When you can’t produce one, it raises questions about how professionally the business is run.

Banks may delay opening accounts, require personal guarantees they otherwise wouldn’t need, or decline to extend credit. They see the lack of an operating agreement as a governance red flag, particularly for multi-member LLCs where unclear ownership could create payment disputes.

Investors considering funding your business will want to see how ownership and voting rights are structured, whether they’ll have veto rights on key decisions, and what restrictions exist on transferring interests. Without an operating agreement, they face uncertainty and risk. Most will either pass on the investment or require you to create an operating agreement (negotiated on their timeline, often with terms more favorable to them than if you’d started with your own document).

Acquisition due diligence always includes reviewing corporate governance. If you’re selling an LLC and can’t provide an operating agreement, buyers assume the worst: unclear ownership, potential hidden claims, and poor business practices. This kills deals or dramatically reduces valuations.

Book a demo to see how a centralized contract management system keeps everything audit-ready.

How often should you update your operating agreement?

An operating agreement is not a document you create once and never touch again. As your business grows, ownership changes, financing evolves, and your management structure matures, your operating agreement needs to evolve with it.

Even a simple LLC operating agreement requires periodic review to ensure it still reflects business reality. More complex multi-member structures need formal amendment processes that keep the document current and enforceable.

1. Key events that should trigger an update

Certain changes to your business structure or operations should automatically trigger a review and potential amendment of your operating agreements:

• Admitting a new member or having an existing member exit (voluntary departure, retirement, buyout, death)
• Raising significant capital from investors, taking on major debt, or changing your capital structure
• Changing from member-managed to manager-managed (or vice versa) or substantially revising decision-making authority
• Expanding into new states or adding new business lines that change your core operational model
• Bringing in outside investors with special rights or preparing for an acquisition that requires clean governance documentation

Each of these events involves negotiating or confirming terms that belong in your operating agreement. Don’t handle them through side letters, email confirmations, or handshake deals. Document them properly through formal amendments or a restated agreement. Contract amendment procedures should be clear in your original operating agreement so everyone knows what’s required to make changes official.

2. Documenting approvals, versions, and signatures properly

When you amend your operating agreement, use written member consents or meeting minutes that show the required approval was obtained (majority vote, supermajority, or unanimous consent, depending on what your agreement requires). Attach these approvals to the amendment or keep them with your corporate records.

Version control prevents the most common source of confusion: multiple documents floating around with different terms. Clearly date each version and give it a descriptive name (“Second Amended and Restated Operating Agreement, dated January 15, 2025”). Include a brief summary of what changed compared to the previous version.

Keep signed copies organized in a way that creates a clear audit trail. You should be able to quickly show a bank, investor, or auditor the progression from original operating agreement to first amendment to second amendment (or to the current restated agreement if you’ve consolidated changes). When versions are scattered across email, Google Drive, members’ laptops, and your lawyer’s file storage, this simple task becomes impossible.

3. Secure storage, access control, and sharing best practices

Store your operating agreement in a single secure digital repository rather than relying on email attachments, desktop folders, or random cloud storage locations that only one person can access. The goal is to ensure the right people can always find the current version without compromising security.

Set up role-based access so members, managers, legal counsel, finance team, and key advisors can view the operating agreement and related governance documents, while limiting access for employees or contractors who don’t need to see ownership or compensation details. When you need to share your operating agreement with a bank, investor, or potential partner, use read-only access or time-limited links rather than emailing uncontrolled copies.

Good contract storage practices and knowing how to organize contracts in a central repository mean you can respond to any request in minutes rather than days. This organizational discipline also makes it easy to track related documents like member consents, amendment approvals, and board resolutions alongside your operating agreement so everything lives in one place.

Make your operating agreement work harder for your business with HyperStart

An operating agreement defines ownership, establishes decision-making authority, allocates economic rights, supports your limited liability structure, reduces member disputes, and signals serious governance to banks and investors. But it only delivers these benefits if it’s thoughtfully drafted, kept current as your business evolves, and easily accessible when members, advisors, or outside parties need to reference it.

Most LLCs create an operating agreement once, save it in email or a shared drive, lose track of which version is current after a few amendments, and then scramble to produce a clean copy when it matters most. That approach wastes the value of having an operating agreement in the first place.

HyperStart’s contract repository gives you a central, organized way to manage your operating agreement and all other critical contracts with version history, approval tracking, AI-powered search, and role-based access that keeps sensitive documents secure while making them instantly available to the people who need them. Book a demo to see how HyperStart keeps your operating agreement and contract portfolio organized, current, and ready for every stakeholder who asks.