Building Your Business Becoming an Owner Business Types What Should I Include in an LLC Operating Agreement? This document may be more important than you know By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on November 6, 2019 In This Article View All In This Article Is an Agreement Required? What Must Be Included? Keeping Records for Your LLC You Shouldn’t Use a Free Template What to Include in an LLC Operating Agreement. Photo: Caiaimage/Sam Edwards/Getty Images Every business needs a “What if?” document that serves as a guide through the process of dealing with questions of ownership and business management. For limited liability companies (LLCs) this “What if?” document is called an operating agreement. The New York Division of Corporations notes that an operating agreement is a document that establishes the rights, powers, duties, liabilities, and obligations of all members of an LLC. Note A better name for an operating agreement might be a membership agreement. This agreement is similar in form to a partnership agreement for a business partnership. Is an Operating Agreement Required? An operating agreement is an important document, even for an LLC with only one member (called a single-member LLC). No state requires you to file your operating agreement with the state, but several states require that you create an operating agreement for your records. For example: California requires LLCs to maintain an operating agreement but not to file it, as not all documents can be filed.New York, Missouri, and Delaware require an operating agreement, but it doesn’t have to be filed with the Department of State. Other states may have similar requirements. Check with your state’s business division (usually in the Secretary of State’s office) to be sure you are meeting all of the legal requirements for having an operating agreement. What Must Be Included in an LLC Operating Agreement? Introduction Information Name of the LLC: Some states may require that the term “LLC” or “Limited Liability Company” be included in the name. See your state website for more details. Information about the Articles of Organization: This document is filed with your state to register the LLC and includes the state where it’s registered and the date. Duration of the LLC: The options are “until dissolved” or until a specific date. Address: This should be the principal office of the LLC. Name and address of the Registered Agent: This is the person who receives legal correspondence and notices. Purpose of the business: This is what you are in business to do. Members, Contributions, and Interest This section of the operating agreement focuses on how members join the LLC, their contributions, their capital (ownership) accounts, and how the profits and losses are distributed to members. It should include: Names of the initial members The amount of their contribution Their ownership interest (percentage) How new members make initial capital contributions and the required amount per member If and when additional contributions are required and how members decide The process for admitting new members How members receive the profits and losses each year How the taxes on this distribution are allocated and distributed Management of the LLC You have two options in the management of the business: It’s member-managed, which includes a single managing memberA hired manager who is an employee Unless the LLC is very small, it’s usually best to designate one person (a member or a manager) to manage the business. You might want a separate compensation and reimbursement agreement for the managing member or outside manager. Other parts of this section include how decisions are made. Does a majority have to agree? Are there some decisions that must be unanimous? Even though you have a manager, your members may want to approve certain decisions, which should be spelled out in this part. Leaving the LLC or Ending It As a Whole This section describes what happens when a member leaves the LLC, when the business automatically ends, and the process for ending the business. It includes: When and how a member can leave, and how a member can be asked to leave the LLC The process for buying back a member’s interest, including how the purchase price is determined and paidThe process for transferring a member’s interest, including restrictions on transfers Liquidation procedures, including distribution of member property Liability Clause Indemnification and liability limitation clauses are an important part of an operating agreement. The legal language says the members have limited liability for their actions as members. Miscellaneous Sections These provisions might include a description for the process of amending the agreement, how notices must be communicated, and the governing law (what state law governs the LLC). Some LLC operating agreements may include special agreements that must be signed by all members. These may include: A non-compete agreement, restricting members from joining competing businesses A conflict of interest policy, stating that the member’s first loyalty is to the LLC A non-disclosure agreement, stating that the member won’t disclose information owned by the LLC, even after they leave the business. Keeping Records for Your LLC Your operating agreement is a good place to describe recordkeeping requirements. Note Keep information about initial member contributions, owner percentages, and additional contributions in a membership record book. Each state has specific recordkeeping requirements, so be sure to check yours. The IRS also offers some information regarding the types of records that you may want to keep for your business. These include receipts, purchases, expenses, assets, employment taxes, and more. Why You Shouldn’t Use a Free Operating Agreement Template It’s never a good idea to use a business contract or agreement unless it’s been written specifically for your business and for your state. The many dangers of using a free agreement form may include: The wrong formMissing language that is critical and should have been includedA lack of language that describes your specific businessSpecific language required by your state is missing The agreement outlined in this article is not intended to be a complete agreement or to be specific legal or tax advice. While not required, you may want to consider working with an attorney to help you write your LLC operating agreement. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Department of State, Division of Corporations, State Records, & UCC. "Forming a Limited Liability Company in New York," Accessed Nov. 6, 2019. California Secretary of State—Business Entities. "Articles of Organization," Accessed Nov. 6, 2019. Missouri Small Business Startup Guide. "Limited Liability Company," Accessed Nov. 6, 2019. State of Delaware Code. Title 6: Chapter 8. 18.101(9) "Limited Liability Agreement," Accessed Nov. 6, 2019. New York State Department of State. "Articles of Organization Sample Template," Accessed Nov. 6, 2019. U.S. Securities and Exchange Commission. "LLC Agreement," Accessed Nov. 6, 2019. U.S. Securities and Exchange Commission. "Limited Liability Company Agreement," Accessed Nov. 6, 2019. Legal Information Institute. 26 U.S. Code § 707. "Transactions between partner and partnership," Accessed Nov. 6, 2019. Internal Revenue Service. "What Kind of Records Should I Keep," Accessed Nov. 6, 2019.