What Is an Operating Agreement and Why It's Important for Your LLC

If you are in the process of creating an LLC (Limited Liability Company) in the United States, one of the most important documents you can have—although not mandatory in many states—is the Operating Agreement.

This document not only outlines how your company will function but also protects your interests and gives structure and clarity to business management. In this article, we explain what it is, what it contains, and why you should have one, even if you're the sole owner of the business.

What Is an Operating Agreement?

An Operating Agreement is an internal legal document that defines the ownership structure, internal management, and operating rules of an LLC. It is the equivalent of the articles of incorporation or bylaws in other types of businesses.

In other words, it sets the “contract” between the members of the LLC (the partners or owners), defines who makes decisions, how profits are distributed, what happens if someone wants to leave, and much more.

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Is an Operating Agreement Mandatory?

It depends on the state. Some states like California, New York, and Missouri formally require it. However, most do not require it by law, but it is strongly recommended for the following reasons:

• Protects your limited liability.
• Establishes clear rules for business operations.
• Serves as legal evidence in case of disputes.
• Adds credibility with banks, investors, and third parties.

In summary: it’s not mandatory, but it is a best practice and, in many cases, essential.

What Does an Operating Agreement Contain?

The content may vary depending on the type and size of the business, but in general, an Operating Agreement should include:

1. Basic Company Information

• Legal name of the LLC
• Registered address
• Date of formation
• State of registration

2. Member Details

• Name of each member (owner)
• Ownership percentage
• Initial capital contribution
• Responsibilities and rights of each member

3. Management Structure

• Will it be member-managed or manager-managed?
• Rules for making important decisions
• Procedures for voting and resolutions

4. Profit and Loss Distribution

• How profits are distributed
• When distributions are made
• Agreed tax treatment

5. Admission and Exit of Members

• Rules for adding new partners
• What happens if a partner withdraws, dies, or wants to sell their share
• Right of first refusal among partners

6. Dispute Resolution

• Mechanisms for resolving conflicts
• Use of mediation or arbitration
• Applicable jurisdiction

7. Additional Clauses

• Duration of the company
• Amendments to the Operating Agreement
• Voluntary dissolution of the LLC

Do I Need an Operating Agreement if I Am the Sole Member of the LLC?

Yes, you do.

Even if you are the sole owner, having an Operating Agreement can:

• Strengthen your legal separation between yourself and the business (liability protection).
• Demonstrate professionalism to banks and suppliers.
• Prevent issues with the IRS in tax matters.
• Be required when applying for a business bank account or license.

Practical Example

Imagine that you and two partners form an LLC in Florida. You don’t create an Operating Agreement, and a year later, one of the partners wants to exit and recover their investment. Since there’s no formal agreement, disputes arise: how much is their share worth? Who can buy it? How are these decisions made?

Main Benefits of the Operating Agreement

Legal Protection

Reinforces the separation between your personal assets and those of the business.

Conflict Prevention

By having clear rules, misunderstandings among partners are avoided.

Operational Clarity

Clearly defines how the company operates, who does what, and how decisions are made.

Facilitates Banking and Legal Processes

Many financial institutions require it to open accounts or access services.

Greater Professionalism

Enhances credibility with clients, potential partners, and investors.

Who Drafts an Operating Agreement?

There are three options:

Do It Yourself

There are online templates, but they require customization and legal knowledge.

Hire a Lawyer

Recommended if there are multiple partners, external investment, or complex situations.

Use Specialized Platforms

Companies like Openbiz can help you create an Operating Agreement tailored to your needs, with legal advice and validation.

Where Is the Operating Agreement Stored?

The Operating Agreement is not filed with the government or the IRS. It is an internal document but should be kept in the company’s legal records. You can share it with banks, accountants, or partners if necessary.

Tip: It’s Not Static—You Can Modify It

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Your company evolves, and the Operating Agreement can also change. It can be updated by voting or agreement among the members, always keeping written records.

What Happens if I Don’t Have One?

If you don’t have an Operating Agreement, your LLC will be governed by the default laws of the state where it was registered. This may mean:

• Equal distribution of profits (even if one member contributed more).
• Lack of clear protection in case of a lawsuit.
• Inability to make fast or strategic decisions.

Final Recommendations

• Customize the document according to your business model.
• Include exit or conflict scenarios (even if they seem unlikely).
• Ensure that all members sign it.
• Review and update it each year or whenever the business structure changes.

The Operating Agreement is a key tool for any LLC, regardless of its size. It sets the rules, protects your interests, and shows that you’re taking your business seriously.

At Openbiz, we help you create your LLC, obtain your EIN, and support your legal structure, including the Operating Agreement, 100% online, from anywhere in Latin America. Book your free consultation today at openbiz.io.

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