Operating Agreement

The private contract among an LLC's owners that decides who controls the company, how money is split, and what happens when someone leaves - or the state's default rules decide it for them.

Looking for a lawyer rather than a definition? Skip to the state-by-state list of law firms for this.

What it means

An operating agreement is the contract among the members of a limited liability company that sets the company's internal rules: who manages it, how profits and losses are shared, how decisions are voted, whether a member can sell their interest, and what happens on death, disability, divorce or a falling-out. It is an internal document. It is generally not filed with the state, and the public formation filing that creates the LLC says almost nothing about any of this.

What makes it matter is what happens without one. Every state's LLC statute contains default rules that apply to any question the members did not answer in writing, and the defaults are often not what co-owners assumed. In many states the default splits profits and votes in a way that ignores who put in more money or more work, and the default rules on leaving can make it hard for a member to get out or hard for the others to keep a departing member's share from passing to a stranger. An LLC with no agreement has an agreement; it is simply one nobody chose.

The agreement is also part of the evidence that the company is a real, separate entity. When a creditor argues that an LLC is a sham and asks a court to reach the owners personally, the absence of any written agreement, or an agreement that was signed and then ignored, is the kind of fact that argument is built on.

Where this comes from

When people hire a lawyer for this

The time to take advice is when the LLC has more than one member and before money changes hands, because the defaults the agreement replaces are the ones that surface only when someone wants out, dies, or stops speaking to the others. A lawyer's value here is less the drafting than asking the questions co-founders avoid: what happens if one of you leaves in a year, and who decides.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono programme or legal aid; a court can also waive its own filing fees.

Find a lawyer for this in your state

Choose your state. Each link opens the Business Organizations directory page for the city in that state with the most currently published law firms that list this work; where a state has more than one, the others open under it. Where a state has no Business Organizations listing yet, the link opens the broader Business Law page instead and is marked so. The list is generated when this page loads, so a state whose listings have lapsed drops out rather than becoming a dead link.

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Related terms

Other entries in the same area of law, each written from the same primary sources.

• Asset Purchase vs Stock PurchaseThe two ways to buy a business - buying what it owns or buying the entity that owns it - and why the choice decides which liabilities come with it, which contracts transfer, and how the price is taxed.
• Breach of ContractA failure to do what a binding agreement required - and the question a court actually asks is not whether someone broke a promise but what the loss was and whether it could have been avoided.
• Buy-Sell AgreementThe contract between co-owners of a business that says what happens to an owner's share when they die, leave, divorce or go bankrupt - who must or may buy it, at what price, and with what money.
• DBA (Fictitious Business Name)A registered trade name under which a person or company does business - which tells the public who is behind the name and does nothing else.
• Fiduciary Duties and the Business Judgment RuleThe duties of care and loyalty that directors, officers, managers and controlling owners owe the business, the rule that protects honest decisions that turned out badly, and the derivative suit that enforces them.
• Franchise Disclosure Document (FDD)The document a franchisor must give a prospective franchisee before any contract is signed or money changes hands - what the federal rule requires it to contain, what it does not promise, and the state laws that add registration and relationship rights.
• General and Limited PartnershipsA general partnership can be formed by conduct with no paperwork and makes every partner personally liable; a limited partnership requires a filing and shields the partners who do not manage. What each is, and the LLP and LLLP variants.
• Indemnification and Hold Harmless ClausesThe contract provision under which one party agrees to cover another's losses and defend it against claims - what it usually reaches, the state laws that void some of it, and why insurance is the other half of the promise.
• Independent Contractor vs EmployeeTwo legal categories of worker with very different consequences for taxes, overtime and liability - and a label in a contract does not settle which one applies.
• Letter of Intent (LOI) and Term SheetThe preliminary document that sets out the main terms of a deal before the contract is drafted - which parts of it are usually binding, which are not, and how a "non-binding" letter still creates obligations.
• Limited Liability Company (LLC)A business form that shields its owners from most business debts while staying simpler to run than a corporation.
• Non-Compete AgreementA promise not to work for a competitor or start a competing business for a period after a relationship ends - enforceable in some states, sharply limited in others, and void in a few.
• Non-Disclosure Agreement (NDA)A contract restricting what one or both sides may do with information the other shares - and, unlike trade secret law, it binds only the person who signed it.
• Personal GuaranteeA promise by an individual - usually a business owner - to pay a company's debt personally if the company does not, which puts the owner's own assets behind the loan or lease regardless of the entity's liability shield.
• Piercing the Corporate VeilThe exception under which a court holds an owner personally liable for a company's debts, despite the limited liability the company normally provides.
• Registered AgentThe person or company a business entity must designate to receive lawsuits and official notices on its behalf - and the address at which a default judgment can quietly begin.
• S Corporation ElectionA tax election, not a kind of company - what electing S status does to how a corporation or LLC is taxed, who is eligible to make it, and how it is lost.
• UCC Financing Statement (UCC-1)The public notice a lender files to stake its claim on a borrower's equipment, inventory, receivables or other business property - the filing that decides who gets paid first when a business fails.

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