What Is an LLC Operating Agreement? Guide and Key Clauses
An operating agreement sets out who owns an LLC, who decides what and what happens when someone leaves. Why single-member LLCs need one too, and the clauses worth getting right.
An LLC operating agreement is the document that says how the company actually works: who owns what share, who can commit the business, how profits are split and what happens when a member wants out. It is an internal agreement among the members rather than something you file with the state.
Why It Matters Even When It Is Not Required
Most states do not require an operating agreement to form an LLC. What they do have is a default set of rules in their LLC statute, and those defaults apply to any question your agreement does not answer. The defaults may split profits in a way you never intended or give a departing member rights you would not have granted. Writing an agreement is how you replace someone else's defaults with your own terms.
For a single-member LLC the argument is different but just as practical. The agreement is part of the evidence that the company is a separate entity from its owner, which is the foundation of the liability protection the LLC exists to provide.
The Clauses That Do the Work
- Ownership and capital: each member's percentage interest and what they contributed to earn it.
- Profit and loss allocation: how distributions are calculated and when they are made.
- Management: member-managed or manager-managed, and which decisions need which approval.
- Voting: whether votes follow ownership percentage or are per capita, and what needs unanimity.
- Transfers: whether a member may sell their interest, and who gets first refusal.
- Dissolution: how the company winds up and how assets are distributed.
The transfer and dissolution clauses are the ones members skim while drafting and read very carefully later, because they are the clauses that govern exactly when the relationship has stopped being friendly.
Tax Treatment Is Separate
An operating agreement does not determine how the IRS taxes the LLC. A single-member LLC is treated as a disregarded entity by default and a multi-member LLC as a partnership, with an election available to be taxed as a corporation. Keep the governance document and the tax election as separate decisions, since changing one does not change the other.
I go through each clause with drafting notes, and the differences between single-member and multi-member agreements, in my guide to the LLC operating agreement for Online Paystub.
Keep It Current
An agreement written at formation and never revisited becomes inaccurate as members join, leave or change roles. Review it whenever ownership shifts, and have a lawyer look at it when real money or multiple members are involved.
