AI Lawyer Blog
Operating Agreement Template Guide(Free Download + AI Generator)
Greg Mitchell | Legal consultant at AI Lawyer
3
An Operating Agreement is the rulebook for your LLC. It spells out who owns what, how decisions get made, how profits are divided, and what happens if someone leaves—or if the business winds down. Even where the law doesn’t require one, banks, investors, and courts expect to see it because it proves your company operates as a separate legal entity (a key pillar of limited liability).
Explore more Letters and Notices templates to strengthen your legal documentation and keep communications clear.
Download the free Operating Agreement template or customize one with our AI Generator—then have a qualified attorney review before you sign.
Table of Contents
What Is an Operating Agreement?
Why You Need One in 2025
Who Uses an Operating Agreement?
Key Legal Requirements & State Variations
Common Provisions in an Operating Agreement
Single-Member vs. Multi-Member LLC Agreements
How to Draft an Operating Agreement
Amending and Updating the Agreement
Common Mistakes to Avoid
Checklist for an Operating Agreement
FAQs
1. What Is an Operating Agreement?
An Operating Agreement is a binding contract among the members of a Limited Liability Company (LLC) that governs internal affairs—ownership, voting, management, capital, distributions, and exit mechanics.
The U.S. Small Business Administration explains that an operating agreement documents “the structure of your company’s financial and functional decisions” and is widely recommended to protect the LLC’s separate status, even if your state doesn’t mandate it. Without one, state default rules fill the gaps—which may not match what you intended.
2. Why Do You Need One in 2025?
The LLC remains the go-to U.S. business structure, and formation remains historically high. Americans filed a record ~5.5 million new business applications in 2023, according to the U.S. Census Bureau’s Business Formation Statistics (BFS). With more founders teaming up (or bringing in capital) post-launch, misunderstandings can get expensive fast. A signed operating agreement helps you:
Preserve limited liability by showing real corporate formalities are followed.
Lock in ownership percentages (units or percentages) and vesting schedules.
Define voting thresholds for major actions and day-to-day decisions.
Clarify profit/loss allocations, distributions, and tax classifications.
Establish buy-sell and exit rules to avoid stalemates.
Document management authority (member-managed vs. manager-managed) for banks and counterparties.
3. Who Uses an Operating Agreement?
Every LLC benefits, but it’s indispensable for:
Multi-member LLCs where roles, money, and votes must be clear.
Family-owned LLCs that want orderly succession planning.
Joint ventures between two companies that need guardrails.
Single-member LLCs, where documenting separateness strengthens the liability shield (and many banks will ask to see it). The SBA also notes some states dissolve an LLC by default when a member joins/leaves—unless your agreement says otherwise.
4. Key Legal Requirements & State Variations
Operating-agreement rules are state-specific, but a few anchors help you plan:
New York: Members are required to adopt a written operating agreement and may do so before, at, or within 90 days after filing Articles of Organization (NY LLC Law §417).
Delaware: The Delaware LLC Act recognizes a “limited liability company agreement” (your operating agreement) that may be written, oral, or implied, and is binding whether or not the LLC signs it (6 Del. C. §18-101(9)).
California: Under the Revised Uniform LLC Act, the operating agreement governs relations among members and managers and can modify many default rules (Cal. Corp. Code §17701.10).
Many states have adopted versions of the Revised Uniform Limited Liability Company Act (RULLCA), which is drafted by the Uniform Law Commission and addresses operating-agreement scope, amendments, and member rights.
5. Common Provisions in an Operating Agreement
A robust agreement typically covers:
Company information (name, principal office, purpose).
Capital & ownership (initial contributions, additional capital, units/percentages, vesting).
Management (member-managed vs. manager-managed; manager powers; fiduciary duties within statutory limits).
Voting (ordinary vs. major decisions; quorum; written consents; supermajorities).
Economics (allocations, distributions, tax matters partner; elections).
Transfers & buy-sell (ROFR/ROFO, permitted transfers, drag/tag, death/disability, divorce, bankruptcy).
Information rights (access to records; Delaware §18-305 illustrates statutory baselines—see code here).
Restrictions (competition limits, confidentiality, assignment).
Dispute resolution (mediation, arbitration, forum).
Dissolution & winding-up (triggers, priorities, liquidator powers).
Tip: Align the operating agreement with your Articles/Certificate of Formation and any investor side letters so they don’t conflict.
6. Single-Member vs. Multi-Member LLC Agreements
Single-member LLCs (SMLLCs)
Emphasize separateness (entity actions, bank accounts, minutes/consents).
Clarify manager authority and a successor agent if the owner is incapacitated.
Address what happens on death (transfer-on-death provisions or trust planning).
Multi-member LLCs
Spell out capital calls and consequences for failure to fund.
Balance voting rights (member class votes, supermajorities, manager vetoes).
Define buy-sell mechanics with clear valuation (appraisal vs. formula) and payment terms.
Manage deadlock (tie-breaker, rotating “casting vote,” Texas shoot-out, or mediation-arbitration).
Many of these concepts are contemplated under RULLCA, but your agreement should tailor them to your needs.
7. How to Draft an Operating Agreement
Step 1: Map ownership & roles. List members, units/percentages, initial capital, and whether the LLC is member- or manager-managed. Banks and counterparties often ask who can bind the company—capture signing authority clearly.
Step 2: Set voting thresholds. Define what’s “ordinary” vs. “major.” Common major matters: issuing new units, mergers, selling substantially all assets, dissolving, admitting a new member, or amending the agreement.
Step 3: Nail the economics. State how allocations and distributions work, timing (quarterly/annual), and who decides reserves. Identify the Tax Matters Partner/Partnership Representative and elections.
Step 4: Protect continuity. Add buy-sell rules (death, disability, divorce, bankruptcy, bad-actor expulsion), transfer restrictions, and—if relevant—key person or non-compete terms within legal bounds.
Step 5: Address disputes & exits. Require good-faith negotiations, then mediation or arbitration; designate your forum and governing law. RULLCA allows operating agreements to specify amendment procedures and conditions.
8. Amending and Updating the Agreement
Your business will evolve—your agreement should, too. Set a clear amendment clause (who can propose, voting threshold, effective date). RULLCA expressly contemplates amendment mechanics and makes new members bound by the existing agreement once they join. Best practice: review annually or on these triggers: new members, capital raise, change of control, tax status change, or major regulatory shift.
9. Common Mistakes to Avoid
No written agreement. In New York, it’s not optional—members must adopt a written agreement within 90 days (NY LLC Law §417).
Vague buy-sell terms. Ambiguity on price and payment creates costly stalemates.
Ignoring default rules. Delaware and many RULLCA states let you contract around many defaults—if you do it explicitly.
No deadlock plan. Without a mechanism, you risk paralysis or judicial dissolution.
Forgetting information rights. Give members reasonable access.
Never updating. Amend after ownership changes or big strategic shifts. The SBA reminds owners to keep governance documents current to stay compliant and ready for diligence.
10. Checklist for an Operating Agreement
Company name, principal office, and purpose.
Member names, addresses, units/percentages, and initial capital.
Management model (member-managed or manager-managed) and authority.
Voting rules, quorum, and consent procedures.
Allocations, distributions, reserves, and tax elections.
Transfer rules, ROFR/ROFO, and buy-sell triggers + valuation.
Information rights and recordkeeping.
Fiduciary duty standards to the extent permitted by your state’s LLC act.
Dispute resolution, governing law, venue, notices.
Amendment mechanics, dissolution, and winding-up steps.
Download the Full Checklist Here
11. FAQs About Operating Agreement
Q: Is an Operating Agreement legally required?
A: It depends on your state. New York law requires members to adopt a written agreement within 90 days of forming the LLC, while Delaware allows written, oral, or even implied agreements that are still binding. Many other states do not mandate one, but having a signed operating agreement is strongly recommended—it proves your LLC operates as a separate entity, helps preserve your liability shield, and meets the expectations of banks, investors, and courts.
Q: Do single-member LLCs really need one?
A: Yes. Even with only one owner, an operating agreement is valuable for demonstrating that the business is separate from your personal affairs. It can document who has authority to sign contracts, set rules for succession if you become incapacitated, and help you open a business bank account. Without it, you risk losing limited liability protections in certain disputes.
Q: Can we modify fiduciary duties?
A: In many states that have adopted the Revised Uniform Limited Liability Company Act (RULLCA), certain fiduciary duties—like the duty to avoid certain conflicts—can be modified if the changes are clearly written into the agreement. However, you cannot remove the duty of good faith and fair dealing. State laws vary, so check your statute before making adjustments.
Q: What happens if we never sign one?
A: Without an operating agreement, your LLC will default to your state’s LLC laws, which might not match your intentions. That could mean profits are divided equally regardless of contributions, or that the LLC automatically dissolves when a member leaves. These default outcomes can create disputes or force costly restructuring.
Q: Do we file it with the state?
A: Usually no. An operating agreement is an internal company document and is not filed with the Secretary of State. You should keep it in your LLC records along with your formation documents. Some states, however, may require you to confirm that an agreement exists even if they do not collect it.
Q: How often should we update our operating agreement?
A: Review it at least once a year and update it whenever major changes occur—such as bringing in new members, changing ownership percentages, altering management structure, or raising capital. Keeping it current ensures it reflects the business’s actual structure and prevents conflicts down the road.
Disclaimer
This guide is for informational purposes only and does not constitute legal, tax, or accounting advice. LLC laws vary by state. Consult a qualified attorney and tax advisor before signing or relying on an Operating Agreement.
Get Started Today
A clear, well-structured Operating Agreement prevents disputes, protects your liability shield, and keeps your LLC bank- and investor-ready. Download the free Operating Agreement template or customize one with our AI Generator—then ask a local attorney to review before you sign.
Need related templates?
Visit our Letters and Notices Templates section for ready-to-use legal forms that help you maintain compliance and avoid disputes.
