LLC Operating Agreement: What to Include, Template Outline, and State Requirements

Last updated: 2026-03-27

Summary:An operating agreement is the internal rulebook for your LLC. It defines ownership, management, profit distribution, voting, and what happens if a member leaves or the business dissolves. Five states require one (CA, DE, ME, MO, NY), but every LLC should have one — even single-member LLCs — to protect your liability shield and avoid state default rules that may not match your intentions. The 12 essential sections cover: formation, members, capital, profits, management, voting, transfers, dissolution, records, taxes, indemnification, and amendments. You can draft one yourself using the template outline below, or have an attorney review it for $200–$500.

What is an operating agreement and who needs one?

An LLC operating agreement is a legal document that establishes the rules governing how your LLC is owned, managed, and operated. It is the most important internal document your LLC will have — it is the contract between the members (owners) that dictates everything from who gets what share of profits to what happens if someone wants to leave.

Without an operating agreement, your LLC is governed by your state's default LLC statutes. These default rules are generic and may not reflect your actual arrangement. For example, most state defaults:

•Split profits equally among all members, regardless of how much each person invested
•Allow any member to bind the LLC to contracts and debts
•Require unanimous consent for major decisions
•May trigger dissolution when a member leaves

An operating agreement lets you override these defaults and create rules that actually match your business. It also serves as critical evidence that your LLC is a legitimate, separate entity — which is essential for maintaining the limited liability protection that is the whole point of having an LLC.

Who needs one:Every LLC — single-member and multi-member alike. Even if your state does not legally require it, banks, investors, partners, and courts expect to see one. And if you ever face a lawsuit, a well-drafted operating agreement is one of the strongest pieces of evidence that your LLC is a separate legal entity, not just an alter ego of its owner.

Which states require an operating agreement?

Five states explicitly require LLCs to have an operating agreement:

State	Requirement	Notes
California	Required	Must be in writing; required by California Corp Code Section 17701.10
Delaware	Required	LLC Act Section 18-101(7); does not need to be in writing but strongly recommended
Maine	Required	Maine LLC Act requires an operating agreement or similar governing document
Missouri	Required	Missouri Revised Statutes Section 347.081
New York	Required	NY LLC Law Section 417; must be adopted within 90 days of formation

Even if your state is not on this list, you should absolutely have an operating agreement. The other 45 states strongly recommend it, and in practice you will need one to open a business bank account, get a loan, bring on investors, or defend your liability protection in court.

What should an operating agreement include?

A comprehensive operating agreement should include the following 12 sections. Each section addresses a critical aspect of how your LLC operates:

Section 1: Formation and Name

Establishes the LLC, its legal name, and the state of formation.

•Full legal name of the LLC
•Date of formation / Articles of Organization filing date
•State of formation
•Principal place of business address
•Purpose of the business (general or specific)

Sample clause language

"The Members hereby form a Limited Liability Company (the 'Company') under the name [COMPANY NAME] LLC, pursuant to and in accordance with the [State] Limited Liability Company Act. The Company was formed by filing Articles of Organization with the Secretary of State on [DATE]. The purpose of the Company is to engage in any and all lawful business activities for which a limited liability company may be organized under the laws of the State of [STATE]."

Section 2: Members and Ownership Interests

Identifies all members and their percentage ownership in the LLC.

•Names and addresses of all members
•Percentage ownership interest of each member
•How new members can be admitted
•Process for transferring membership interests
•Whether membership interests can be assigned or sold

Sample clause language

"The Members of the Company, their respective addresses, and their Membership Interest percentages are as set forth in Exhibit A, attached hereto and incorporated herein. No additional Members shall be admitted without the written consent of Members holding at least [two-thirds / a majority] of the total Membership Interests. Membership Interests may not be transferred, assigned, or encumbered without compliance with Article [7] of this Agreement."

Section 3: Capital Contributions

Documents what each member contributes to start or fund the LLC.

•Initial capital contribution amounts (cash, property, services)
•Schedule for future contributions (if any)
•What happens if a member fails to make a required contribution
•How contributions are valued (especially non-cash contributions)
•Whether members receive interest on contributions

Sample clause language

"Each Member shall make an initial Capital Contribution as set forth in Exhibit A. No Member shall be required to make any additional Capital Contribution without such Member's written consent, except as may be required by a [majority / unanimous] vote of the Members. No interest shall accrue on any Capital Contribution. If a Member fails to make a required Capital Contribution within thirty (30) days of the due date, the other Members may, by majority vote, dilute the defaulting Member's interest proportionally."

Section 4: Profit and Loss Distribution

Defines how the LLC distributes profits and allocates losses among members.

•How profits are distributed (pro rata by ownership, or a custom split)
•How losses are allocated
•Frequency of distributions (monthly, quarterly, annually, or as decided)
•Priority of distributions (guaranteed payments first, then profit shares)
•Tax distribution provisions (ensure members receive enough to cover tax liability)

Sample clause language

"Net profits and net losses of the Company shall be allocated among the Members in proportion to their respective Membership Interest percentages. Distributions of available cash shall be made [quarterly / as determined by the Manager(s)] in proportion to each Member's Membership Interest. Notwithstanding the foregoing, the Company shall distribute to each Member, no later than [April 1] of each year, an amount sufficient to cover such Member's estimated tax liability attributable to the Company's income for the preceding fiscal year (a 'Tax Distribution'), calculated at the highest marginal tax rate applicable to individuals."

Section 5: Management Structure

Establishes whether the LLC is member-managed or manager-managed.

•Member-managed vs. manager-managed designation
•If manager-managed: who the managers are, how they are appointed/removed
•Scope of manager authority — what managers can do without member approval
•Compensation for managers (if any)
•Officers (if any): titles, roles, authority (President, Treasurer, Secretary)

Sample clause language

"The Company shall be [member-managed / manager-managed]. The Manager(s) shall have the authority to enter into contracts, open and maintain bank accounts, collect funds due to the Company, and perform all acts necessary for the ordinary conduct of the Company's business. The Manager(s) shall NOT, without the prior written consent of Members holding at least [two-thirds] of all Membership Interests: (a) sell or dispose of all or substantially all Company assets; (b) merge or consolidate the Company; (c) borrow money in excess of $[AMOUNT]; (d) enter into any lease exceeding $[AMOUNT] per year; or (e) admit a new Member."

Section 6: Voting Rights and Decision-Making

Defines how decisions are made and what requires a member vote.

•Voting power (typically proportional to ownership interest)
•What constitutes a quorum for meetings
•Majority vs. supermajority vs. unanimous vote thresholds for different decisions
•Actions that require member approval (e.g., selling assets, taking on debt, admitting new members)
•How meetings are called and conducted (including virtual meetings)
•Whether written consent can substitute for a formal meeting

Sample clause language

"Each Member shall be entitled to one vote per percentage point of Membership Interest. A quorum shall consist of Members holding more than fifty percent (50%) of all Membership Interests. Ordinary business decisions shall require a simple majority vote. The following actions shall require a [supermajority / two-thirds / unanimous] vote: amendment of this Agreement, dissolution, sale of substantially all assets, admission of new Members, and any transaction between the Company and a Member. Any action that may be taken at a meeting may be taken without a meeting if a written consent is signed by Members having the requisite voting power."

Section 7: Transfer of Membership Interests

Controls how members can sell, transfer, or assign their ownership.

•Right of first refusal — existing members get first option to buy
•Restrictions on transfer (e.g., requires majority approval)
•Valuation method for buyouts (book value, appraised value, formula)
•Buy-sell provisions (triggered by death, disability, departure, divorce)
•Payment terms for buyouts (lump sum, installments, timeline)

Sample clause language

"No Member may sell, assign, transfer, pledge, or otherwise dispose of all or any portion of such Member's Membership Interest ('Departing Interest') without first offering to sell such interest to the remaining Members on the same terms ('Right of First Refusal'). The Company and remaining Members shall have sixty (60) days to exercise this right. The purchase price shall equal the fair market value of the Departing Interest, determined by [an independent appraiser agreed upon by the parties / the formula set forth in Exhibit B], reduced by a discount of [15%] for lack of marketability and minority interest."

Section 8: Dissolution and Winding Up

Defines when and how the LLC can be dissolved.

•Events that trigger dissolution (vote, bankruptcy, death of a member, court order)
•Vote required to dissolve (majority, supermajority, or unanimous)
•Process for winding up — selling assets, paying debts, distributing remaining assets
•Order of priority for distributions upon dissolution
•Filing requirements with the state (Articles of Dissolution)

Sample clause language

"The Company shall be dissolved upon the first to occur of: (a) a vote to dissolve by Members holding at least [two-thirds] of all Membership Interests; (b) entry of a decree of judicial dissolution; or (c) any event that makes it unlawful for the Company to continue. Upon dissolution, the Company shall wind up its affairs by: (i) paying all debts and obligations of the Company; (ii) setting aside reasonable reserves for contingent liabilities; and (iii) distributing the remaining assets to the Members in proportion to their Membership Interests. The Manager(s) shall file Articles of Dissolution with the Secretary of State within thirty (30) days."

Section 9: Books, Records, and Bank Accounts

Establishes record-keeping and financial management procedures.

•Where books and records are kept
•Members' right to inspect books and records
•Fiscal year (calendar year or other)
•Bank account(s) — who is authorized to sign and transact
•Accounting method (cash or accrual)
•Who prepares tax returns and financial statements

Sample clause language

"The Company shall maintain complete and accurate books and records at its principal place of business. The fiscal year shall be the calendar year. The Company shall use the [cash / accrual] method of accounting. Each Member shall have the right to inspect and copy the Company's books and records during normal business hours upon reasonable notice. The [Manager / designated Member] shall be responsible for preparing or causing to be prepared all tax returns and delivering Schedule K-1s to each Member no later than March 15 of each year."

Section 10: Tax Elections

Specifies how the LLC is taxed and any elections to be made.

•Default tax classification (disregarded entity for single-member; partnership for multi-member)
•Whether the LLC elects S-Corp or C-Corp tax treatment
•Tax matters partner/member designation (who handles IRS communications)
•Provisions for tax distributions (to cover members' personal tax liability)

Sample clause language

"The Company shall be classified for federal income tax purposes as [a disregarded entity / a partnership / an S-Corporation]. [Member Name] is hereby designated as the 'Partnership Representative' (formerly known as the Tax Matters Partner) under IRC Section 6223, with full authority to act on behalf of the Company in any tax audit, investigation, or proceeding. The Company shall not elect to be classified as a corporation for tax purposes without the unanimous written consent of all Members."

Section 11: Indemnification and Liability

Protects members and managers from personal liability for business decisions.

•Indemnification of members and managers for actions taken in good faith
•Limitation of liability for members and managers
•Exceptions (fraud, willful misconduct, breach of fiduciary duty)
•Insurance requirements (whether the LLC must carry D&O or GL insurance)

Sample clause language

"The Company shall indemnify and hold harmless each Member and Manager from and against any and all claims, losses, damages, liabilities, and expenses (including reasonable attorneys' fees) arising out of or in connection with the Company's business, provided that such Member or Manager acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company. This indemnification shall not apply to any act or omission involving fraud, willful misconduct, or a knowing violation of law."

Section 12: Amendments and Miscellaneous

How the agreement can be changed and standard legal provisions.

•How the operating agreement can be amended (vote required, written consent)
•Governing law (which state's laws apply)
•Dispute resolution (mediation, arbitration, or litigation)
•Severability clause (invalid provisions do not void the entire agreement)
•Entire agreement clause (supersedes prior oral or written agreements)
•Notices — how official communications are delivered between members

Sample clause language

"This Agreement may be amended only by a written instrument signed by Members holding at least [two-thirds / a majority] of all Membership Interests. This Agreement shall be governed by and construed in accordance with the laws of the State of [STATE]. Any dispute arising under this Agreement shall first be submitted to mediation. If mediation fails within thirty (30) days, the dispute shall be resolved by binding arbitration under the rules of the American Arbitration Association. If any provision of this Agreement is held invalid, the remaining provisions shall remain in full force and effect. This Agreement constitutes the entire agreement among the Members and supersedes all prior agreements and understandings."

How does a single-member operating agreement differ from multi-member?

Provision	Single-Member LLC	Multi-Member LLC
Ownership	100% to sole member	Defined percentage for each member
Management	Sole member manages; simple	Member-managed or manager-managed; needs clear authority
Voting	Not needed — sole member decides everything	Critical — must define voting thresholds and processes
Profit distribution	All profits to sole member	Must define split, guaranteed payments, and frequency
Transfer/buyout	Minimal — but address what happens at death/incapacity	Essential — right of first refusal, valuation, payment terms
Dispute resolution	Not applicable (no co-member to dispute with)	Critical — mediation, arbitration, or litigation clause
Dissolution	At sole member's discretion	Must define triggering events, required vote, wind-up process
Complexity	2-5 pages typical	10-25+ pages typical

Single-member takeaway:Even though many provisions are simpler for a single-member LLC, the document still serves a critical purpose — it proves your LLC is a separate legal entity, which protects your personal assets. At minimum, include: formation details, member identification, management authority, profit/loss treatment, succession plan (what happens if you die or become incapacitated), and tax elections.

Operating agreement template checklist

Use this checklist to make sure your operating agreement covers all essential provisions. Check off each item as you draft or review your document:

Formation & Identity

☐ LLC legal name, state of formation, date formed
☐ Principal place of business
☐ Business purpose (general or specific)
☐ Registered agent information
☐ Duration (perpetual or fixed term)

Members & Ownership

☐ All members listed with addresses
☐ Ownership percentages defined
☐ Initial capital contributions documented
☐ Process for admitting new members

Money & Taxes

☐ Profit and loss allocation method
☐ Distribution frequency and priority
☐ Guaranteed payments to working members (if any)
☐ Tax distribution provisions
☐ Tax election (default, S-Corp, C-Corp)
☐ Fiscal year and accounting method

Management & Decisions

☐ Member-managed or manager-managed
☐ Managers identified (if manager-managed)
☐ Voting rights and thresholds defined
☐ Actions requiring member approval listed
☐ Meeting and written consent procedures

Transfers, Exit & Dissolution

☐ Right of first refusal on transfers
☐ Buy-sell provisions and triggering events
☐ Valuation method for buyouts
☐ Dissolution triggers and process
☐ Succession plan (death/incapacity)

Legal & Administrative

☐ Indemnification and limitation of liability
☐ Dispute resolution (mediation/arbitration)
☐ Amendment process
☐ Governing law (state)
☐ Severability and entire agreement clauses
☐ Signature blocks for all members with date

What are the most common operating agreement mistakes?

These are the mistakes that cause the most disputes, lawsuits, and unintended consequences for LLC owners:

1. Not having an operating agreement at all

Consequence: State default rules apply. These may not match your intentions — for example, profits may be split equally regardless of ownership percentage, and any member can bind the LLC to contracts.

Fix: Create an operating agreement immediately, even for a single-member LLC. It costs $0 if you draft it yourself using a template.

2. Using a generic template without customization

Consequence: Boilerplate language may conflict with your actual arrangement, create unintended obligations, or miss provisions specific to your industry or situation.

Fix: Start with a template, then customize every section. If your LLC has multiple members or complex arrangements, have an attorney review it.

3. Not addressing what happens when a member leaves

Consequence: Without buyout provisions, a departing member's interest can end up in limbo, triggering disputes, litigation, or forced dissolution.

Fix: Include detailed buy-sell provisions with a clear valuation method, payment terms, and triggering events (voluntary withdrawal, death, disability, divorce, bankruptcy).

4. Failing to define 'reasonable compensation' or guaranteed payments

Consequence: Members who work in the business may feel underpaid while passive members feel overcharged. This is the number one source of LLC disputes.

Fix: Specify guaranteed payments (salary-like compensation) for working members separately from profit distributions. Define how compensation is determined and when it can be changed.

5. Not specifying a dispute resolution process

Consequence: Disagreements go straight to expensive litigation. A lawsuit between LLC members can cost $50,000-$200,000+ and destroy the business.

Fix: Include a dispute resolution clause: mediation first, then binding arbitration, then litigation as a last resort. This saves time, money, and relationships.

6. Equal ownership without a tiebreaker mechanism

Consequence: In a 50/50 LLC, deadlocks can paralyze the business. Neither member can override the other, leading to operational gridlock.

Fix: If you must do 50/50, add a deadlock resolution mechanism: a neutral third-party mediator, a shotgun (buy-sell) clause, or a designated tiebreaker for specific decisions.

7. Not updating the agreement when things change

Consequence: Your agreement becomes outdated and may not reflect current ownership, management, or business operations. Courts may not enforce provisions that clearly contradict actual practice.

Fix: Review and update your operating agreement annually or whenever there is a major change (new member, capital contribution, role change, or business pivot). File amendments in writing.

Official Resources

Frequently Asked Questions

What is an operating agreement?

An operating agreement is a legal document that governs the internal operations of an LLC. It defines how the business is owned, managed, and operated — including ownership percentages, profit distribution, management structure, voting rights, what happens when a member leaves, and how the LLC can be dissolved. Think of it as the 'rulebook' that all members agree to follow. Without one, your state's default LLC laws apply, which may not match your intentions.

Do I need an operating agreement for a single-member LLC?

While only five states legally require one (California, Delaware, Maine, Missouri, and New York), every single-member LLC should have an operating agreement. It separates your personal affairs from business affairs, which strengthens your limited liability protection. Without one, a court might argue your LLC is just an alter ego — meaning creditors could pierce the corporate veil and reach your personal assets. An operating agreement also helps with opening bank accounts, getting loans, and establishing credibility with clients.

Can I write my own operating agreement?

Yes. There is no requirement to use an attorney. Many single-member LLC owners successfully draft their own operating agreements using templates and guides. For multi-member LLCs with complex arrangements (unequal ownership, different capital contributions, active and passive members), it is strongly recommended to have a business attorney review the document. A one-hour attorney review typically costs $200-$500 and can save you from expensive disputes later.

Which states require an operating agreement?

Five states explicitly require LLCs to have an operating agreement: California, Delaware, Maine, Missouri, and New York. New York requires it to be adopted within 90 days of filing Articles of Organization. However, even in the other 45 states, having an operating agreement is considered best practice and is effectively necessary to maintain your liability protection, open business bank accounts, and resolve disputes.

What is the difference between an operating agreement and articles of organization?

Articles of Organization (also called a Certificate of Organization or Certificate of Formation) is the document you file with the state to legally create your LLC. It is a public document that includes basic information like your LLC name, registered agent, and principal address. An operating agreement is an internal document that is not filed with the state and is not public. It governs the detailed operations of your LLC — ownership, management, distributions, and more. You need both: the articles to create the LLC and the operating agreement to run it.

What is the difference between member-managed and manager-managed?

In a member-managed LLC, all members participate in day-to-day business decisions and have the authority to bind the LLC to contracts. This is the default in most states and works well for small LLCs where all members are actively involved. In a manager-managed LLC, one or more designated managers (who may or may not be members) handle daily operations, while non-managing members act more like passive investors. Manager-managed is better when some members want to invest but not participate in operations.

Can I change my operating agreement later?

Yes. Operating agreements can be amended at any time, as long as you follow the amendment process specified in the agreement itself. Typically, amendments require a majority vote or written consent of the members. Always document amendments in writing, have all members sign, and attach the amendment to the original agreement. Major changes — like altering ownership percentages or management structure — should ideally be reviewed by an attorney.

Does an operating agreement need to be notarized or filed with the state?

No. In nearly every state, an operating agreement does not need to be notarized, witnessed, or filed with the state. It is a private internal document between the LLC members. That said, all members should sign it, date it, and keep a copy with their business records. Some banks and financial institutions may ask to see your operating agreement when you open a business account or apply for a loan.

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This is general information, not legal advice. Operating agreement requirements vary by state. The template outline above is an educational guide, not a legally binding document. For multi-member LLCs or complex business arrangements, consult a business attorney to draft or review your operating agreement. Sources: SBA.gov, state LLC statutes, Uniform Law Commission.