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When you form an LLC, one of the first things you will hear about is the operating agreement. Some states require you to have one. Most do not. And because it is not a document you file with the state and nobody sends you a reminder about it, a lot of LLC owners either skip it entirely or put together something minimal and forget it exists.
That is a mistake that tends to surface at the worst possible times: when a bank asks for it, when a co-founder dispute turns into a legal fight, when a lawsuit questions whether your LLC is a real separate entity, or when a member dies and nobody thought to address what happens to their ownership stake.
What is an operating agreement?
An operating agreement is a legal document that governs how your LLC is run internally. It is not filed with the state. It is not public. It sits with your business records and serves as the rulebook for how your LLC operates.
It covers who owns the LLC and in what percentages, how decisions are made, how profits and losses are distributed, what happens when someone wants to leave, how new members can be admitted, what happens if a member dies or becomes incapacitated, and how the LLC can be dissolved.
Think of it the way you would think of a partnership agreement, a shareholder agreement, or a constitution. It is the foundational document that tells everyone involved in the LLC, and any outside party who needs to understand the structure, how the business works and what the rules are.
Which states require one?
A small number of states legally require LLCs to have an operating agreement. As of 2026 those states are California, Delaware, Maine, Missouri, and New York.
In those states you are technically required to have one, though penalties for not having one are generally not severe. The state is not checking whether you have drafted your agreement or monitoring its contents.
In every other state an operating agreement is optional from a statutory standpoint. The question is not really whether the state requires it. The question is whether your business, your bank, your liability protection, and your relationships with other members require it. The answer to those questions is almost always yes.
What happens if you do not have one
When an LLC does not have an operating agreement, the rules of your state’s default LLC statute take over. Every state has default rules that apply to LLCs that have not specified their own terms. These defaults are generic rules written for the average LLC rather than rules tailored to your specific situation.
Here are a few examples of how state defaults often work in the absence of an operating agreement.
In many states, profits and losses are split equally among all members regardless of how much each member contributed. If you contributed $90,000 and your co-founder contributed $10,000 but you have no operating agreement specifying how profits are divided, the default in many states is a 50/50 split.
In many states, major decisions require unanimous consent of all members. If you have three members and one becomes unresponsive or uncooperative, you may not be able to make significant business decisions, take on new contracts, or open a bank account without their agreement.
In many states, if a member leaves, dies, becomes bankrupt, or gets divorced, the default rules govern what happens to their membership interest. Those defaults may result in an unintended party, such as a deceased member’s estate or a member’s ex-spouse, having a claim on the business.
In some states the LLC dissolves when a member leaves unless the remaining members vote to continue within a short window. If you have two members and one decides to exit, the default rules in some states would dissolve the LLC entirely rather than allowing the remaining member to continue.
These are not fringe scenarios. They come up in real businesses constantly. The operating agreement is how you specify what actually happens instead of living with the state’s default answers.
What goes into an operating agreement
Ownership structure. This identifies the members and their respective ownership percentages. For a single-member LLC this is straightforward. For a multi-member LLC it is the authoritative record of who owns what, and it should address how ownership percentages can change when new members join or existing ones are bought out.
Capital contributions. This covers how much each member has contributed or is expected to contribute, whether in cash, property, or services. It establishes the starting financial relationship between members and provides a reference point for future disputes.
Profit and loss distributions. This specifies how profits and losses are allocated and how and when distributions are made. Many LLCs distribute in proportion to ownership percentage, but many do not. Whatever structure you agree to should be written here.
Management structure. LLCs can be member-managed, where all members have authority to act on behalf of the business, or manager-managed, where one or more designated managers have that authority and other members are more passive. The operating agreement specifies which structure applies and what decisions require member approval versus manager authority.
Voting rights and decision-making. This covers what percentage of votes is needed for different types of decisions. Routine decisions might be handled by a manager or majority vote. Major decisions like taking on significant debt, selling the business, or admitting a new member might require a supermajority or unanimous consent.
Transfer restrictions. This governs whether and how members can transfer their ownership interest to someone else. Without clear transfer restrictions, a member could sell their interest to anyone, including a competitor. Common provisions include a right of first refusal requiring a departing member to offer their interest to existing members before selling to an outsider.
Buy-sell provisions. This addresses what happens when a member wants to exit or a triggering event occurs. Triggering events typically include voluntary departure, death, disability, retirement, divorce, and bankruptcy. The provisions specify whether the LLC or other members have the right or obligation to buy the departing member’s interest, how the price is determined, and how payment is structured. Without these, a departing member’s estate or a divorcing member’s spouse can end up owning part of your business.
Dissolution. This covers the circumstances under which the LLC can be dissolved, the winding-down process, how assets are liquidated, how debts are paid, and how remaining assets are distributed.
Why single-member LLC owners still need one
The temptation for single-member LLC owners is to see the operating agreement as a document for multi-member situations and skip it entirely.
That reasoning misses several important points.
Banks ask for it. When you open a business bank account at a traditional bank, the banker will often ask for your operating agreement along with your articles of organization and EIN. Having one ready avoids friction.
It supports your liability protection. Courts deciding whether to pierce the corporate veil of a single-member LLC look at whether the business was operated as a genuine separate entity. A single-member LLC with no operating agreement, no separate bank account, and no business records is an easy target for the argument that the LLC was just a formality. An operating agreement is evidence that you took the structure seriously.
It addresses what happens if you die or become incapacitated. Even though you are the only member right now, something can happen to you. Without an operating agreement that addresses what happens to the LLC’s ownership interest, the membership interest passes to your estate under default rules that may not result in the business going to who you would have chosen. An operating agreement coordinates with your estate plan.
It sets the foundation for future changes. If you ever add a member, bring in an investor, or convert to a multi-member structure, having a solid single-member operating agreement gives you a foundation to amend from rather than starting from scratch.
Why multi-member operating agreements cannot be treated as optional
Business partners who start out aligned often find themselves in disagreement as the business evolves. Someone wants to grow faster, someone wants more distributions, someone stops contributing as much, someone wants to bring in a new partner the others dislike, someone has a health crisis, someone gets divorced and their spouse suddenly has an interest in the business.
When these situations happen with a solid operating agreement in place, you have a document that tells everyone involved what the rules are. When they happen with no operating agreement, you have a legal vacuum that gets filled by state default rules that nobody specifically agreed to.
The cost of drafting a solid multi-member operating agreement with an attorney is typically between $500 and $2,000 depending on complexity. The cost of a dispute between members who have no operating agreement and end up in litigation is orders of magnitude higher, not counting the damage to the business and the relationships involved.
How detailed does it need to be?
For a single-member LLC, one to three pages covering ownership, management authority, profit distribution, and what happens on death or incapacity is sufficient for most situations. The main goal is to have a document that demonstrates the LLC was taken seriously as a separate entity.
For a multi-member LLC, the right length depends on the complexity of the arrangement. A simple two-person equal partnership might need ten to fifteen pages. A more complex arrangement with unequal contributions, tiered distributions, different classes of membership interest, and detailed buy-sell provisions will run longer.
The operating agreement should be long enough to address every situation that could create a dispute and short enough that everyone actually reads and understands it.
Can you write your own?
For a single-member LLC, using a reputable state-specific template is reasonable for most straightforward situations. Customize it to reflect your actual situation rather than leaving placeholder text unchanged.
For a multi-member LLC, using a template as a starting point is fine but having an attorney review the final document before signing is strongly advisable. The provisions that matter most, particularly buy-sell provisions, transfer restrictions, and dissolution terms, require careful drafting. A template with ambiguous language in key sections is not much better than having no agreement at all when a dispute arises.
doola offers operating agreement templates and formation packages that include the documents you need to set up your LLC properly from day one.
What your state’s default rules actually say
Most state LLC statutes are based on some version of the Revised Uniform Limited Liability Company Act, though each state has modified it in various ways. Common defaults that frequently do not reflect what LLC owners actually want include:
Voting by membership interest, where you vote in proportion to ownership percentage. Equal sharing of profits and losses regardless of ownership in some states. Unanimous consent for major actions. Dissolution on dissociation of a member in some states unless the remaining members vote to continue. No default restriction on transfers of economic interest to third parties.
The specifics vary by state. Go to your state’s LLC statute or talk to a business attorney to understand exactly what defaults apply to your LLC without an agreement.
When things go wrong without one
A member dies and their family asks what happens to the ownership interest. Without an operating agreement the default rules apply and the outcome may be something nobody wanted.
Two members disagree about a major business decision. Without an operating agreement you are arguing about what the rules should be at the same time you are arguing about the decision itself.
A member wants to leave and expects to be bought out. Without an operating agreement you are negotiating buyout terms from scratch under adversarial conditions.
A bank or investor asks for the operating agreement as part of due diligence. Not having one signals that the LLC is not run professionally.
None of these scenarios require a large or complex business. They happen in two-person LLCs and single-member LLCs with complicated personal situations all the time.
If you have been operating without one
Draft one now rather than waiting for one of the situations above to force the issue.
For a single-member LLC, start with a state-specific template, customize it to reflect your actual situation, sign and date it, and keep it with your business records.
For a multi-member LLC, all members should agree on the key provisions first: how profits are split, how decisions are made, what happens if someone wants to leave, how buyouts are valued. Get alignment on those questions before drafting, then have an attorney draft the agreement. Trying to draft the agreement without first agreeing on the substance creates a document negotiation rather than a drafting process.
The cost of getting one
For a single-member LLC, the cost ranges from free using a quality template from your state bar association or a reputable legal document service, to a few hundred dollars through an online legal service or a simple attorney draft.
For a multi-member LLC, attorney-drafted agreements typically cost between $500 and $2,000 for a straightforward arrangement. The savings from using an online service instead of an attorney for a complex multi-member agreement are not worth the risk of getting a key provision wrong.
Bottom line
An operating agreement is not a formality. It is the foundational internal governance document for your LLC, and its absence creates real risk regardless of whether your state technically requires one.
For a single-member LLC it supports your liability protection, satisfies bank requirements, and addresses what happens if something happens to you. It does not need to be long. It does need to exist.
For a multi-member LLC it is the document that prevents the disputes, defaults, and surprises that break up business partnerships and cost far more in legal fees than the agreement ever would have cost to draft properly.
The state not requiring one does not mean you do not need one. It just means nobody will check until something goes wrong. By then it is too late to draft it retroactively and have it protect you from the situation you are already in.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.
Sponsored by doola. doola helps US and international founders start, run, and stay compliant with their US business. From LLC formation and operating agreement preparation to registered agent service and ongoing compliance, doola handles the paperwork so you can focus on building.
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