What Is an Operating Agreement (And Why Every LLC Needs One)
Operating Agreements: What They Are and Why They Matter
Think of your Operating Agreement like a business prenup.
It’s not the most romantic part of launching a company, but it’s one of the most important. This document outlines who owns what, how decisions get made, and what happens if someone wants out — just like setting ground rules before a marriage.
Even if you're a solo LLC, an Operating Agreement can help you open a business bank account, handle taxes properly, and avoid legal headaches down the line.
In this guide, we’ll break down what it covers, why it matters, and how to avoid the most common mistakes small business owners make when drafting one.
What Is an Operating Agreement?
An operating agreement is a legal contract used by LLCs to define how the business is structured and managed.
Whether you're running a solo shop or co-owning with others, this document answers key questions:
- Who owns what?
- How are profits and losses shared?
- Who makes decisions?
- What happens if someone exits?
In some states, it’s legally required. In others, it’s just smart business. Without one, you risk confusion—or worse, legal trouble—if something goes wrong. It also makes you look more legit to banks, investors, and partners.If you haven’t formed your LLC yet, a service like ZenBusiness can help you file quickly and affordably.
If you haven’t formed your LLC yet, a service like ZenBusiness can help you file quickly and affordably.
When to Use an Operating Agreement
✅ You’re registering a new LLC
✅ You want to formalize a partnership or clarify roles
✅ You need a business bank account
✅ You’re applying for funding or onboarding investors
✅ You want to avoid state default rules if something goes wrong
Checklist: What to Define in Your Agreement
- Who are the members (owners)?
- What percentage of ownership does each have?
- How are profits and losses divided?
- Who has voting power (and how is it weighted)?
- Who will manage the business—members or managers?
- What happens if someone exits or wants to sell?
✔ Want to simplify this? Use the LLC Agreement Template inside your SMVRT Legal account to auto-generate your first draft.
Common Legal Pitfalls to Avoid
⚠️ No management structure defined → Leads to confusion during key decisions
⚠️ No exit or buyout plan → Creates chaos if someone leaves or wants out
⚠️ No amendment clause → Makes it hard to legally update or revise your agreement
✔ Pro tip: Use clear, plain-English language—and make sure all members sign.
Operating Agreement vs. Partnership vs. Buy-Sell: What’s the Difference?
| Agreement Type | Purpose | Best For |
|---|---|---|
| Operating Agreement | Defines LLC structure + operations | LLCs (solo or multi-member) |
| Partnership Agreement | Clarifies partner roles + ownership | General partnerships |
| Buy–Sell Agreement | Covers exits, death, disputes | LLCs or Corps with co-owners |
Build Your Agreement
✅ Want to create your Operating Agreement in minutes? Use SMVRT Legal’s customizable template 👇
Build Your Operating Agreement Now >
LEGAL TIP FROM THE EXPERTS
"Many business owners assume a handshake agreement is enough, but when disputes arise, the lack of a written Operating Agreement can be disastrous. Having clear terms for ownership, voting rights, and exit options protects not just the company, but also the personal relationships behind it."