Operating Agreement 101: What It Is and Why Your LLC Needs One

By Joni Thrower Davis  ·  Attorney & Co-founder, EntrepreNOW

General information, not legal, tax, or financial advice; reading it doesn’t create an attorney-client relationship, and laws vary by state.

An operating agreement is the prenup of your business.

Nobody wants to bring it up at the wedding. Everybody wishes they had one at the divorce.

I'm an attorney and a business owner, and I serve on boards where the governing documents are the first thing everyone reaches for when people disagree. So take this from me, the time to write the rules is before anyone needs them.

What it is

Your Articles of Organization tell the state your LLC exists. Your operating agreement says how it runs: who owns what, who decides what, how money comes out, and what happens when life happens.

It's internal. In most states you never file it — you sign it, keep it with your records, and follow it.

Do you legally need one?

Maybe legally, definitely practically.

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CHECK YOUR STATE

A handful of states require LLCs to have an operating agreement. New York, for example, requires a written one within 90 days after you file your Articles of Organization. Many states don't require one at all. Check your state's LLC law or ask a local attorney.

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Even where it isn't required:

• Your bank will probably ask before opening a business account, especially with more than one owner.
• Without one, your state writes your rules. Every state has defaults that kick in when there's no agreement. They were written for everyone, which means they weren't written for you, and they may split profits or decisions in ways you never intended.
• It backs up your liability shield. A signed agreement is evidence the LLC is a real, separate business and not just you with a fancy name.
• It prevents fights. Clear rules turn "I thought we agreed" into "page 4 says."

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What a good one covers

• Ownership and contributions. Who owns what percentage, and what each person put in — cash, equipment, or work.
• Management. Member-managed (owners run it) or manager-managed (designated managers do).
• Decisions and voting. Which calls need a majority, which need everyone, and what happens in a tie.
• Money. How and when profits get distributed, and whether anyone is paid for their work separate from profits.
• New owners. Whether you can bring in a partner or investor, and who has to agree.
• Exits and buyouts. What happens if someone wants out, stops showing up, or gets divorced, and how their share gets valued.
• Death or disability. What happens to an owner's share if they pass away or can't work.
• Winding down. How you close and divide what's left.

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If that list makes you uncomfortable, that's the point. Those conversations are cheap now and expensive later.

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THE LAWYER IN THE ROOM

Equal isn't always fair. Plenty of friends-and-family businesses start at 50/50 because it feels right, but 50/50 with no tie-breaker is a recipe for deadlock. Decide now how ties get broken: one person has the final say in certain areas, a trusted advisor weighs in, or you agree to mediation.

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Building with people you love

Our founders build with siblings, cousins, best friends, and spouses. That's a strength. It's also where I see the most heartbreak, because people skip the paperwork to avoid looking like they don't trust each other.

Here's the reframe: writing it down isn't about distrust, it protects the relationship. When the rules are clear, nobody has to be the bad guy.

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REAL TALK FROM JONI

In our family business, before we each became owners of our own restaurants, we each had dedicated roles — attorney, operations, communications. Even then, the swim lanes got messy. So you can only imagine what happens with three owners and three opinions, who all happen to be siblings. Take the time and write it out.

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"But it's just me."

Solo owners skip this more than anyone. Who are you going to argue with, yourself?

It still does real work: it supports the separation between you and the business, it answers the bank's questions, and it says what happens to the business if something happens to you.

Three ways people get this wrong

• A template nobody read. If the agreement says manager-managed and your Articles say member-managed, you have a problem.
• Signing it and forgetting it. New owner, new roles, new money? Update it and re-sign.
• Handshake side deals. If it isn't in the agreement, it's much harder to enforce.

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Quick answers

Do I file it with the state? Generally no. Keep a signed copy with your records and share it with your bank when asked.

Can I write my own? Yes — start from a solid template and customize it. With multiple owners or investors, have an attorney in your state review the final version.

ENTREPRENOW

Write the rules while everyone's still smiling.

Launch NOW includes the operating agreement template, LLC resolutions, and the eBook that walks you through them. [Get the Launch NOW Toolkit →]

About the author: Joni Thrower Davis is an attorney, a second-generation business owner, and a co-founder of EntrepreNOW, where she helps first-generation founders build businesses that are legally sound and built to last. 

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