Contract Glossary
Operating Agreement
Definition
The foundational governance document for a Limited Liability Company (LLC) that establishes the rights, responsibilities, and relationships between the members (owners). It covers capital contributions, profit distribution, management structure, voting rights, member withdrawal or addition, and dissolution procedures. While not always legally required, operating without one is like driving without insurance — fine until something goes wrong.
In Practice
Two friends start a web development LLC with equal 50/50 ownership. They skip the operating agreement because 'we trust each other.' Two years later, one partner wants to take on outside investment; the other doesn't. One partner is working 60-hour weeks; the other has a full-time job elsewhere. Without an operating agreement, there's no mechanism to resolve these disputes, no way to force a buyout, and no clear definition of each partner's obligations. An operating agreement would have addressed all of this on day one — capital calls, minimum commitment requirements, decision-making thresholds, and exit mechanisms.
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Frequently asked questions about operating agreement
It varies by state. Some states (like New York and California) require LLCs to have an operating agreement. Others don't legally require one but strongly recommend it. Even where not required, operating without one means your LLC is governed by default state laws — which may not match your intentions. Default rules often impose equal profit splits, equal voting rights, and restrictive transfer rules that may not work for your business.
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Create your contractThis content is for informational purposes only and does not constitute legal advice. For contracts with significant financial or legal implications, review by a qualified attorney is recommended.