Operating Agreement
A private written contract among the members of an LLC that governs ownership percentages, profit allocation, voting rights, management, and exit terms.
Definition
An Operating Agreement is the internal constitution of a Limited Liability Company. Unlike the Articles of Organization, it is not filed with the state - it is a private contract signed by the members of the LLC and held in the company records. The agreement sets out who owns what percentage of the LLC (the membership interests), how profits and losses are allocated (which can differ from ownership percentages), whether the LLC is member-managed or manager-managed, voting thresholds for ordinary and major decisions, capital-contribution and capital-call mechanics, transfer restrictions and rights of first refusal, drag-along and tag-along rights, dissolution events, and tax-elections including whether the LLC will be taxed as a partnership, S-Corp, or C-Corp. Most US states do not legally require an LLC to have an Operating Agreement - California, Delaware, Maine, Missouri, and New York are exceptions - but every bank, investor, and payment processor will ask for one. Without an Operating Agreement, the LLC is governed by the default rules of the state LLC act, which are often unfavorable, particularly around buyouts and dispute resolution. For single-member LLCs, the Operating Agreement is short but still important: it confirms the separation of personal and business assets that protects the limited-liability shield.
When you'll encounter it
You sign the Operating Agreement immediately after the Articles of Organization are filed and the EIN is issued. Banks like Mercury, Brex, and Wells Fargo will ask for it as part of business-account onboarding. Investors, including angels and VCs investing in LLCs (rare but it happens), will require a fully amended-and-restated Operating Agreement that reflects their preferred-unit terms. If you later convert the LLC to a C-Corp for VC funding, the Operating Agreement is replaced by a Certificate of Incorporation, bylaws, and shareholder agreements.
Used in our guides
- Opening a US Business Bank Account: Requirements for Foreign and Domestic Businesses
- Cost of Starting a Business in the USA: State-by-State Breakdown
- How to Register a Company in the USA: LLC, C-Corp, and S-Corp Guide
- US Company Formation for Indian Citizens: Complete 2026 Guide
- USA LLC vs C-Corp vs S-Corp: Which Structure to Choose
FAQ
Is an Operating Agreement legally required?
Most states do not require one, but California, Delaware, Maine, Missouri, and New York do (some only for multi-member LLCs). Even where not required, every bank and payment processor will ask for one, and without an Operating Agreement the LLC is governed by default state-law rules, which are usually unfavorable.
Does a single-member LLC need an Operating Agreement?
Yes, even single-member LLCs benefit from one. It documents the separation of personal and business assets, which is the single most important factor in maintaining the limited-liability shield if the LLC is ever sued. Without it, courts can more easily pierce the corporate veil.
Can the Operating Agreement override state default rules?
Yes, that is precisely its purpose. It can override almost every default rule in the state LLC statute - voting thresholds, profit allocations, transfer restrictions - subject to a small set of mandatory provisions like fiduciary-duty floors and creditor protections.
References
- Delaware Code Title 6 - Limited Liability Company Act https://delcode.delaware.gov/title6/c018/
- California Corporations Code - Revised Uniform Limited Liability Company Act https://leginfo.legislature.ca.gov/faces/codes_displayexpandedbranch.xhtml?tocCode=CORP
- IRS - LLC Tax Classification Election https://www.irs.gov/forms-pubs/about-form-8832