1. 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 evolve your agreement legal

✔ Pro tip: Use clear, plain-English language—and make sure all members sign.

Operating Agreement vs. Partnership vs. Buy-Sell: What’s the Difference?

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."

— HAMNA ZANE  | CORPORATE & CONTRACTS LAWYER + LEGAL RESEARCHERS

Operating Agreement FAQs

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2. Partnership Agreements: What They Are and Why They Matter

Starting a business with someone you trust can be exciting — but without a partnership agreement, even small disagreements can lead to big fallout. Whether it’s a 50/50 business or a three-person team, this agreement sets the ground rules. It defines how decisions are made, who owns what, how profits are split, and what happens if someone wants out.

A strong partnership agreement prevents misunderstandings, protects the business, and ensures that you’re building on a solid legal foundation — not just a handshake.

What Is a Partnership Agreement?

A partnership agreement is a legal contract between two or more people who share ownership of a business. It outlines each partner’s responsibilities, contributions, and entitlements, and includes clear terms for resolving disputes and handling exits.

While not always legally required, having one helps avoid costly litigation, protects your equity, and ensures your business can keep running — even if a partner leaves or relationships change.

Most partnership agreements cover:

• Profit and loss distribution
• Ownership percentages
• Decision-making processes
• Dispute resolution
• Exit terms and buyouts
• When to Use a Partnership Agreement

When to Use a Partnership Agreement

Checklist: What to Define in Your Agreement

✅ Ownership Breakdown

• Clarify each partner’s equity percentage and capital contribution.

✅ Decision-Making

• Set rules for voting, major decisions, and tie-breaking procedures.

✅ Profit & Loss Sharing

• Outline how revenue will be split and how losses are shared or absorbed.

✅ Roles & Responsibilities

• Define each partner’s duties — who handles what, and where accountability lies.

✅ Partner Exit Terms

• Explain what happens if a partner wants to leave, including valuation methods.

✅ Dispute Resolution

• Include mediation or arbitration clauses to resolve disagreements without court.

✅ Non-Compete / Confidentiality

• Add restrictions to protect trade secrets and avoid direct competition after a split.

Common Legal Pitfalls to Avoid

⚠️ No clear equity split → Leads to conflict when profits roll in
⚠️ Undefined decision-making → Can stall business operations
⚠️ No exit strategy → Causes chaos when a partner leaves
⚠️ No dispute clause → Disagreements go straight to court

3. Shareholder Agreements: What They Are and Why They Matter

Bringing on investors or co-owners in a corporation? A handshake isn’t enough. A Shareholder Agreement defines the rules behind the ownership — who has control, how shares can be sold or transferred, and what happens if a shareholder wants out.

This contract helps you avoid boardroom chaos, protects against hostile takeovers, and ensures that everyone’s equity — and voice — is respected. Whether you're running a family business or raising funds, it’s essential for long-term success and legal clarity.

Most shareholder agreements include:

• Voting rights and board control
• Restrictions on selling or transferring shares
• Buyout procedures and share valuation methods
• Dividend policies
• Exit and succession planning
• When to Use a Shareholder Agreement

When to Use a Shareholder Agreement

✅ You’re forming a corporation with multiple shareholders
✅ You’re raising capital from friends, family, or outside investors
✅ You want to prevent forced sales or equity dilution
✅ You need to protect minority shareholders or founders
✅ You’re planning succession or exit strategies

Checklist: What to Define in Your Agreement

✅ Voting Rights & Control

• Clarify who gets to vote on key business matters and how much influence each shareholder has.

✅ Equity Transfer Restrictions

• Prevent outside parties from acquiring shares without approval by defining first rights of refusal and transfer terms.

✅ Buy-Sell Clauses

• Outline what happens if someone wants to sell their shares — including valuation rules and funding mechanisms.

✅ Dividend Distribution

• Explain how and when profits will be shared among shareholders.

✅ Board of Directors

• Define how directors are appointed and what decisions require board approval.

✅ Dispute Resolution

• Avoid deadlocks and lawsuits by establishing how disagreements will be resolved.

✅ Exit Planning & Succession

• Prepare for retirement, death, or departure with pre-agreed terms for share redistribution.

Common Legal Pitfalls to Avoid

Partnership Agreement vs. Operating Agreement vs. Founders’ Agreement

4. Buy-Sell Agreements: What They Are and Why They Matter

What happens if a co-owner wants to leave the business — or passes away unexpectedly? Without a plan, the remaining owners could be forced to buy out at a bad price, split control with someone’s spouse, or end up in court. A Buy-Sell Agreement prevents that.

This agreement defines exactly what happens when a partner exits, becomes disabled, retires, or dies. It’s not just about the “what ifs” — it’s about protecting your company, your equity, and your future when change is inevitable.

What Is a Buy-Sell Agreement?

A Buy-Sell Agreement is a binding contract between co-owners that outlines how ownership interests will be handled if one partner exits the business. It includes the process, terms, and funding mechanisms for buying out a partner’s shares.

It’s sometimes called a “business prenup” — because it prepares for the end before it happens, and makes sure the breakup doesn’t break the business.

Most buy-sell agreements include:

• Triggering events like death, disability, or retirement
• Valuation methods (fixed price, appraisal, formula-based)
• Buyout procedures and timelines
• Funding methods (insurance, installment plans, company purchase)
• Restrictions on transferring shares to outsiders

When to Use a Buy-Sell Agreement

✅ You co-own a business with one or more partners
✅ You want to prevent disputes during an exit or emergency
✅ You’re planning for succession or retirement
✅ You want control over who owns shares after a partner leaves
✅ You’re working with family or closely held partners

Checklist: What to Define in Your Agreement

✅ Triggering Events

• Define events that initiate a buyout — death, disability, retirement, bankruptcy, or voluntary exit.

✅ Valuation Method

• Decide how the business or ownership interest will be valued — fixed price, multiple of earnings, or third-party appraisal.

✅ Funding Strategy

• Clarify how the buyout will be paid for — life insurance, corporate funds, personal funds, or installments.

✅ Right of First Refusal

• Prevent outside buyers by giving existing partners the first chance to buy a departing owner’s shares.

✅ Timeline & Process

• Establish how quickly a buyout must occur, and what steps are required.

✅ Ownership Transfer

• Restrictions limit who can become an owner and how shares can be transferred.

✅ Tax & Legal Provisions

• Address tax consequences, step-up in basis, and compliance with relevant state laws.

Common Legal Pitfalls to Avoid

⚠️ No clear valuation process → Leads to unfair pricing and delayed buyouts
⚠️ No funding plan → Leaves remaining owners scrambling for capital
⚠️ No trigger events defined → Creates confusion during illness or disputes
⚠️ No transfer restrictions → Risk of shares ending up with unwanted parties

Buy-Sell Agreement vs. Shareholder Agreement vs. Operating Agreement