What is an operating agreement and how to create one

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So, you took the leap and started your own business. Maybe you’ve already chosen your LLC name, niche, and target audience, but before opening your doors, there’s one piece of paperwork that can make or break how smoothly your business runs: your LLC operating agreement. 

This document is the blueprint for how your business works day to day. Who makes the big calls? How are profits shared? What happens if someone wants out? An operating agreement for an LLC answers all those questions (and then some) so you’re not scrambling later.

Let’s explore what an operating agreement is, why it’s important, and how to write one in more detail.

What is an LLC operating agreement?

An LLC operating agreement is a legal document that outlines the rules, roles, and ownership structure of a limited liability company. It is a foundational document for any LLC because it covers important details like each member’s responsibilities, how profits and losses will be divided, and what happens if someone wants to leave or new members join. 

In short, an operating agreement is your opportunity to make sure everyone’s on the same page before business takes off.

Why an operating agreement matters (even if it’s not required)

An LLC operating agreement is important for both single-member and multi-member businesses. Even in states that do not require one, this document helps safeguard your company and keep everything running smoothly. When done correctly, operating agreements:

• Protect your assets: Reinforces the legal separation between your personal finances and your business.
• Clarify ownership: Defines each member’s contributions and ownership percentages.
• Prevent disputes: Establishes how decisions are made and how profits are distributed.
• Support operations: Provides a roadmap for daily management and outlines what happens if a member leaves or a new one joins.

If you skip this step, state laws will dictate how your LLC operates. Those default rules may not match the way you want your business to function, which can create unnecessary confusion and conflict.

For more guidance on forming your company, read our guide to starting an LLC.

States that require an LLC operating agreement

Not every state requires an LLC operating agreement, but a few do. They do not require businesses to file their operating agreement with the state, but an agreement must be in place for LLCs to be compliant. Even in states that do not require it, creating an agreement is still a great way to protect your business

The states that currently require an LLC operating agreement are:

• California
• Delaware
• Maine
• Missouri
• New York

Key components of an LLC operating agreement

Every successful LLC needs structure. The operating agreement provides that structure by laying out the details that guide ownership, decision-making, and daily operations, rather than leaving things open to interpretation.

If your state requires LLCs to have an operating agreement, they may have specific rules on what to include. However, the following components should be in most agreements:

1. Business information: Basic details such as the LLC’s name, address, and purpose.
2. Member details: Names of all members, along with their roles and responsibilities.
3. Management structure: Specifies whether the LLC will be managed by its members or by appointed managers.
4. Voting: Rules for how decisions will be made and how voting power is distributed.
5. Capital contributions: Records of each member’s initial and ongoing financial contributions.
6. Profit and loss allocation: Defines how profits and losses will be divided among members.
7. Member changes: Guidelines for what happens if a member leaves, passes away, or if new members join.
8. Dissolution: Steps for closing the LLC and distributing assets if the business ends.

Frequently overlooked mistakes (and how to avoid them)

Drafting an LLC operating agreement isn’t necessarily complicated, but many business owners overlook important details. Small mistakes in this document can cause big problems later, from ownership disputes to gaps in legal protection. Here are some common pitfalls and how to steer clear of them:

• Relying only on generic templates: Templates are helpful starting points, but they usually don’t fully cover the unique needs of your business. Use a template as a guide, then customize it to reflect your LLC’s structure, members, and goals.
• Leaving out key details: Missing information about voting rights, profit allocation, or member responsibilities can create confusion. Double-check that your agreement clearly outlines all core components, including ownership and decision-making rules.
• Not updating after business changes: As your LLC grows, so should your agreement. Adding new members, changing contributions, or shifting management structures all require updates. Review and revise your operating agreement regularly so it always reflects your current business.
• Overlooking state requirements: Some states require operating agreements, while others don’t. Research your state’s rules so your LLC stays compliant.

Create your own LLC operating agreement 

Writing an operating agreement for an LLC can feel daunting, but it’s not as complex as it might seem. Follow the steps below, or learn about how GoDaddy Airo can help you quickly set up an LLC. As you write, remember to tailor each section of your operating agreement to your business needs and goals.

Gather your LLC information (name, address, purpose)

Your operating agreement should start by outlining the identity of your company. All information found in this section should match the details you have provided to your state. Take your time writing this because it can help prevent issues with banks, licenses, and future compliance.

Add member details and ownership percentages

This part defines who owns the LLC and how much of it they control. Be sure to include:

• Names and contact information for each member
• Initial ownership percentages
• A breakdown of contributions (cash, property, or services)

When calculating ownership percentages:

1. Start with the total contributions made, then calculate each member’s share as a percentage.
2. If contributions aren’t cash, assign a fair market value agreed upon by all members.
3. Double-check that ownership percentages add up to 100%.

Choose your management structure and outline decision-making

There are two main LLC types that define how your LLC will be run on a day-to-day basis: member-managed and manager-managed.

Once you’ve chosen your business structure, document the following in your operating agreement:

• Which structure you’re choosing
• Who has the authority to make decisions
• Which decisions require member approval (e.g., taking on debt, admitting a new member)
• Voting thresholds for major actions

Specify voting procedures

Voting rules prevent disagreements from stalling progress. Common voting options are:

• One vote per member (equal representation regardless of ownership percentage)
• Votes weighted by ownership percentage (more common in multi-member LLCs)

Your operating agreement should clearly explain how voting works and how decisions are made. This includes information about:

• Quorum requirements (how many members must be present to vote)
• Approval thresholds for standard and major decisions
• Rules for written or electronic votes outside formal meetings

List capital contributions

Capital contributions record the money or resources members put into the LLC at the start. This is usually factored into ownership percentages and represents each member’s commitment level. An LLC operating agreement should list:

• The amount and type of each member’s contribution (cash, property, services)
• Due dates for any promised contributions
• How additional contributions will be handled in the future

Define allocation of profits and losses

This section of your operating agreement explains how financial results will be shared among members. Many LLCs divide profits and losses based on ownership percentage, but they can use custom allocations if all members agree on this method. 

Be sure to stipulate how and when distributions will be made, such as monthly, quarterly, or annually. Clearly defining profit and loss allocations helps prevent disputes and ensure fair treatment. 

Set rules for adding or removing members

All businesses evolve over time. Having written procedures for membership changes helps keep your LLC stable during major transitions. Your operating agreement should include:

• Requirements for admitting new members (approval vote, updated contributions, amended agreement)
• Buyout process if a member leaves voluntarily or due to death, disability, or other reasons
• Valuation method for buyouts (set formula or independent appraisal)

Include dissolution procedures

No one wants to think about their business closing when they’ve only just begun building it, but planning for that possibility is just as important as planning for growth. Adding a dissolution section to your LLC operating agreement ensures that finances are wrapped up properly, responsibilities are clear, and everyone knows what to expect. Without this roadmap, disputes and legal issues can drag out the closure process.

Dissolution procedures should include:

• Triggers for dissolution: Define the events that could lead to closing your LLC. Common triggers include a majority or supermajority member vote, the end of a specified business term, bankruptcy, or a court order.
• Approval requirements: Specify how many members must agree to dissolve the company. Many LLCs require at least two-thirds approval, but you can set the percentage that fits your business.
• Steps for closing the business: This usually includes steps like no longer taking on new business, notifying clients, vendors, and employees, selling or liquidating assets, and paying off debts or outstanding obligations.
• Distributing remaining assets: After debts are settled, any remaining funds or property should be distributed according to ownership percentages or another agreed formula.
• Filing paperwork: Many states require LLCs to file Articles of Dissolution with the Secretary of State to officially terminate their business. You may also need to file final tax returns and cancel business licenses or permits.

Start an LLC with GoDaddy

An LLC operating agreement is one of the most important tools for protecting your business. Taking the time to create an agreement now means fewer surprises later. You’ll know exactly how your LLC runs, and every member will be on the same page.

Frequently Asked Questions

What is in an operating agreement?

An operating agreement is a legal document that lays out how your LLC will be run. It includes things like ownership percentages, member responsibilities, how profits and losses are divided, and what happens if a member leaves or the business closes. It also covers voting procedures, management structure, and capital contributions.

Do I really need an operating agreement for my LLC?

Operating agreements are not required for LLCs in every state. However, having one in place protects your limited liability status, clarifies how decisions are made, and prevents disputes. Without an operating agreement, your LLC defaults to state laws, which may not reflect how you want to run your business.

Can I write my own operating agreement for my LLC?

Yes, you can write your own LLC operating agreement. Many business owners start with a template and customize it to fit their needs. As long as your agreement covers the key components, it can be a valid legal document. However, if your LLC is more complex or has multiple members, it’s a good idea to have a business attorney or accountant review your draft to confirm that it protects everyone involved and meets state requirements.