What Is an Operating Agreement?

An operating agreement is the governing document of an LLC that sets out ownership, management, profit sharing and what happens when members join, leave or disagree.

Category: Legal and IP · Reviewed 11 November 2026 · 2 min read

How it works

An operating agreement is signed by the members of a limited liability company. It typically covers each member's ownership percentage, capital contributions, how profits and losses are shared, who manages the company, how votes work, and how a member can transfer or exit. It may also address what happens on death, divorce or sale of the company.

Many states do not require an LLC to file one, and some require one only in certain cases, but the rules vary by state. If the document is missing or silent on an issue, the state's default LLC statute fills the gap, and those defaults may not match what the owners expected. Tax treatment, such as how profits are allocated, may also depend on its terms, so an accountant should review it.

Example

For example, two members start an LLC with an equal split, but one puts in more money and the other does more work. Their operating agreement states how capital is returned, how profits are shared, and that major decisions need both signatures. When they later disagree about hiring, the agreement tells them how to decide.

Why founders care

The operating agreement is the main rulebook for an LLC. It is also what banks, investors or buyers may ask to see. It is different from a founders' agreement, which is a contract among founders about their working relationship, though the two can overlap. A corporation uses bylaws and stockholder agreements instead of an operating agreement.

Common mistakes

Relying on state default rules without reading them.
Using a generic template without checking it fits the business.
Not updating the agreement when members or ownership change.
Leaving out exit and buyout terms.

Frequently asked questions