Operating Agreement
Definition
An Operating Agreement is an internal legal document that outlines the ownership structure and operating procedures of an LLC. It dictates how profits are split, who has voting power, what happens if a member wants to leave the company, and how the business will be managed.
Why it matters
Even though most states do not require you to file your operating agreement with the government, it is considered the most important document your LLC will have. Without an operating agreement, your business is subject to the default rules of your state, which may not align with what you and your partners want. Furthermore, banks will require a copy of your operating agreement to open a business checking account, and courts will look for it if your LLC is ever sued to verify that you are operating as a legitimate separate entity.
Example
Alice and Bob start an LLC and split it 50/50. They draft an operating agreement stating that if the business needs more money, each partner must contribute equally. A year later, the business is struggling. Without the operating agreement, Alice could refuse to put more money in. Because they signed the operating agreement, Bob has legal grounds to force Alice to contribute her half or forfeit a portion of her ownership.