**Short Answer: Your Operating Agreement explains how the LLC will be managed, how taxes are paid, and how profits and losses are distributed. It’s basically the “rules” of your LLC.**
What is an Operating Agreement?
An Operating Agreement is an agreement for the member(s) of your LLC that sets forth how the LLC will be managed both financially and operationally.
Your Operating Agreement also spells out how much of the LLC each member owns.
You can have 1 member who owns 100%, you can have 2 members with a 50/50 split, 60/40, 70/30 (anything really!), or you can have 3 or more members and you can split the ownership any way you’d like.
The LLC is a flexible business structure. There is no limit on the number of members you can have. And, there are no restrictions on how you split the ownership of the company.
Unlike your LLC Formation Documents, the Operating Agreement does not need to be mailed anywhere.
You don’t need to mail it to the State.
You don’t need to mail it to the IRS.
It is strictly an “internal document”.
This means that you will just keep a copy with your other business documents.
Purpose of the Operating Agreement
Again, the purpose of the Operating Agreement is to spell out who the member(s) are and what percentage of the LLC they own, also known as their “membership interest”.
It also defines how the LLC is managed, how taxes are paid, and how profits and losses are distributed amongst the member(s).
Remember, your LLC can be owned by one person (called a Single-Member LLC) or your LLC can be owned by 2 or more people (called a Multi-Member LLC).
What You Need for Your Operating Agreement
In order to complete your Operating Agreement, you will need some basic information.
- The formation date of your LLC.
- The name and address of the Registered Office and Registered Agent.
- The general business purpose of the LLC.
- Member(s) percentages of ownership.
- Names of the Members and their addresses.
Your final Operating Agreement is not “set in stone”. You can make changes as needed.
Making Changes to your Operating Agreement
One of the benefits of forming an LLC is the flexibility of managing your business.
The Operating Agreement is a working document that is meant to be fluid and allow for changes as your business grows.
If you want to make simple changes (such as a change of address for a member or changing your Registered Office or Registered Agent), you’ll need to revise the original Operating Agreement.
If, however, you need to make complex changes (for example one member purchases the interests of another member, or you decide to raise financing with investors), it is best to hire an attorney. Making changes like these can have negative legal and tax consequences if done incorrectly.
Once all changes are made, you’ll need to print the new Operating Agreement and have all of the members sign it.
It is best practice to keep a copy of all versions of your Operating Agreement so you have a history of the changes that were made.
Who Needs Your Operating Agreement?
You may need to provide a copy of your Operating Agreement to:
- A lender if you are obtaining financing
- A title company if you are purchasing real estate
- Accounting and tax professionals for financial assistance
- Lawyers for legal advice
- Potential investors or partners who have an interest in your business
Operating Agreement Protects Your Assets
If you’re involved in a legal battle, the Court will likely ask for your LLC’s Operating Agreement.
Having one can help prove to the Court that you have a legitimate LLC and that you are running your business properly.
Download LLC Operating Agreement Template [Free]
None of the Secretary of States’ Offices provide an LLC Operating Agreement (except for Nevada).
However, you can download our free LLC Operating Agreement here:
How do I complete my LLC Operating Agreement?
Click the link below for step-by-step instructions:
LLC Operating Agreement instructions
Hope that helps!
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.