Free LLC Operating Agreement Generator

About This Tool

Generate a professional LLC operating agreement tailored to your business structure in just six simple steps with our comprehensive wizard-based generator. When forming a single-member LLC or a multi-member partnership, our free tool creates a detailed operating agreement that covers all essential provisions including member rights and responsibilities, initial capital contributions and future funding requirements, profit and loss allocation methods, management structure selection between member-managed and manager-managed models, voting procedures and decision-making thresholds, transfer restrictions and buy-sell provisions, and dissolution and winding-up procedures. An operating agreement is absolutely essential for protecting your limited liability status by demonstrating your LLC is a legitimate separate entity, preventing costly disputes among members through clear written rules, establishing transparent ownership percentages and capital account tracking, demonstrating your LLC's legitimacy to banks when opening accounts or securing loans, satisfying investor due diligence requirements, and providing clear guidance to the IRS on tax treatment and profit allocations. While most states don't legally require an operating agreement for LLCs, having one is universally considered a critical best practice that can save you from expensive legal battles, partnership breakups, and personal liability exposure down the road. Our intuitive step-by-step process guides you through each decision point with helpful explanations and real-world examples, then generates a complete customized agreement you can download as a professionally formatted PDF or copy to your clipboard for further editing. No legal expertise required to use the generator, though we always recommend having an experienced business attorney review the final document to ensure it meets your state's specific LLC requirements and addresses your unique business needs and risk factors.

Why Every LLC Needs an Operating Agreement

Even if your state doesn't legally require an operating agreement, creating one is one of the smartest decisions you can make for your LLC. Here's why:

1. Protects Your Limited Liability Status

Without an operating agreement, courts may treat your LLC as a sole proprietorship or general partnership, potentially piercing the corporate veil and exposing your personal assets to business liabilities. An operating agreement demonstrates that your LLC is a legitimate separate entity, not just your alter ego.

2. Overrides Default State Laws

If you don't create your own rules, your state's default LLC laws apply. These one-size-fits-all rules often don't match how you actually want to run your business. For example, many states default to equal profit sharing regardless of ownership percentage, or require unanimous consent for routine decisions. Your operating agreement lets you customize these rules to fit your situation.

3. Prevents Disputes and Clarifies Expectations

Most LLC conflicts arise from misunderstandings about roles, responsibilities, and profit sharing. An operating agreement documents these agreements in writing when everyone is on good terms, preventing "he said, she said" disputes later. It answers critical questions: Who makes decisions? How are profits distributed? What happens if someone wants to leave? Can members sell their ownership?

4. Essential for Banking and Financing

Banks typically require an operating agreement before opening business accounts or extending credit. Investors and lenders want to see how your LLC is structured, who has authority to sign contracts, and how ownership interests are divided. Without this document, securing funding becomes much harder.

5. Tax Treatment Clarity

The IRS uses your operating agreement to determine how to tax your LLC. Single-member LLCs are typically taxed as sole proprietorships (disregarded entities), while multi-member LLCs are taxed as partnerships. However, you can elect corporate taxation if your operating agreement supports it. Clear documentation prevents IRS challenges and audit complications.

6. Facilitates Business Transitions

What happens when a member dies, becomes disabled, wants to retire, or gets divorced? Your operating agreement should address these scenarios with buy-sell provisions, valuation methods, and transfer restrictions. Planning for transitions while everyone is healthy and happy prevents panic decisions during crises.

Single-Member vs Multi-Member LLC Operating Agreements

The number of LLC members significantly affects what your operating agreement should include. Here's how single-member and multi-member agreements differ:

Single-Member LLC Operating Agreements

Even though you're the only owner, you still need an operating agreement to:

Maintain liability protection: Demonstrates your LLC is a legitimate entity separate from you personally, which is critical if you're ever sued.
Establish banking relationships: Banks want to see formal documentation of your LLC's structure and your authority to act on its behalf.
Plan for succession: What happens if you die or become incapacitated? Your agreement should name a successor or outline how your interest passes to heirs.
Document capital contributions: Recording your initial investment and how you'll add capital creates a clear audit trail for tax purposes.

Single-member agreements are simpler because you don't need provisions for voting, dispute resolution, or buy-sell arrangements. However, you should still address management authority, profit distributions, and dissolution procedures.

Multi-Member LLC Operating Agreements

When you have partners, your operating agreement becomes essential for preventing conflicts. Critical provisions include:

Capital contributions: Who puts in how much money, property, or services? What happens if someone doesn't contribute their promised share?
Ownership percentages: How is ownership divided? This doesn't have to match capital contributions. One partner might contribute cash while another contributes expertise or existing business assets.
Profit and loss allocation: Will profits be distributed equally or proportionally to ownership? Can you take distributions even if the business needs to retain cash?
Management structure: Is it member-managed (all owners participate) or manager-managed (one person or hired manager runs day-to-day operations)?
Voting rights: What decisions require unanimous consent vs. majority vote? Should voting power match ownership percentage?
Transfer restrictions: Can members sell their ownership? Do other members get first right of refusal? What happens if someone wants out?
Buy-sell provisions: How do you value ownership interests if someone leaves, dies, or is bought out? Who can force a buyout?
Dissolution terms: Under what circumstances can the LLC be dissolved? How are assets distributed?

The more members you have, the more detailed your agreement should be. Three equal partners in a local business need different provisions than a 70/30 split between an active operator and a silent investor.

Member-Managed vs Manager-Managed LLCs

One of the most important decisions you'll make is how your LLC will be managed. This choice affects day-to-day operations, decision-making authority, and liability exposure.

Member-Managed LLCs

In a member-managed LLC, all owners participate in running the business. This structure is like a partnership where everyone has a voice.

When to choose member-managed:

Small number of active owners (typically 2-4 members)
All members work in the business and want involvement in decisions
Simple business operations that don't require specialized management
Strong trust and good communication among members

Advantages:

Simpler structure with less bureaucracy
All owners have direct control and authority
No need to hire or appoint a separate manager
Better for businesses where each member brings unique expertise

Disadvantages:

Can slow decision-making if members disagree
All members are exposed to liability for actions taken on behalf of LLC
Difficult to scale as membership grows
Passive investors may not want management responsibility

Manager-Managed LLCs

In a manager-managed LLC, members appoint one or more managers (who can be members or outside hires) to run day-to-day operations. Members retain voting rights on major decisions but aren't involved in daily management.

When to choose manager-managed:

Mix of active and passive investors
Large number of members (5+ members)
Some members contribute capital but don't want operational involvement
Professional management expertise is needed
Real estate investments or holding companies

Advantages:

Centralizes decision-making for faster operations
Passive members have limited liability exposure
Easier to bring in professional management talent
Clear delineation between operational and strategic decisions
Attractive to investors who want returns without management duties

Disadvantages:

More complex governance structure
Passive members have less control over daily operations
Manager may need to be compensated separately from distributions
Requires clear operating agreement defining manager's authority and limitations

Hybrid Approach:

Many LLCs use a hybrid structure where one or more members serve as managers. For example, in a 70/30 LLC, the 70% owner might be designated as the sole manager with authority for day-to-day decisions up to $25,000, while major decisions (new locations, large purchases, admitting members) require approval from both members. This gives operational flexibility while protecting minority interests.

Capital Contributions and Profit Distributions

How you structure capital contributions and profit distributions can make or break an LLC partnership. These provisions affect taxes, control, and fairness among members.

Types of Capital Contributions

Cash: The simplest form. Member contributes money to the LLC's bank account.
Property: Real estate, equipment, vehicles, or inventory. Must be valued fairly (consider getting appraisals for expensive items to prevent disputes).
Services: A member's time, expertise, or labor. Be cautious because the IRS may treat services as taxable income to the contributing member.
Intellectual Property: Patents, trademarks, copyrights, or trade secrets. Requires careful valuation and transfer documentation.
Existing Business: One member contributes an ongoing business operation with customers, contracts, and goodwill.

Capital Contribution Best Practices

Document everything: Create written records of all contributions with dates and values. This establishes each member's capital account balance for tax purposes.
Value contributions fairly: If one member contributes $50,000 cash and another contributes a used truck, get the truck appraised to determine its fair market value. Overvaluing contributions leads to tax problems and member resentment.
Address unequal contributions: Ownership percentage doesn't have to match contribution percentage. You might give 50/50 ownership to members who contributed 70/30 if the smaller contributor brings critical expertise. Just document the reasoning.
Plan for additional capital needs: What happens if the business needs more money? Are members required to contribute proportionally? What happens if someone can't or won't contribute? Can the LLC bring in new members instead?

Profit and Loss Allocation

Your operating agreement should specify how profits and losses are allocated for both accounting and tax purposes. Common approaches:

Proportional to ownership: The default and most common. A 60% owner gets 60% of profits and bears 60% of losses.
Equal distribution: Each member gets an equal share regardless of ownership percentage. Rarely used except among equal partners.
Special allocations: Custom arrangements like "Member A gets first $50,000 of profit as return of capital, then remaining profit is split 50/50." The IRS scrutinizes special allocations, so consult a tax advisor.
Preferred returns: Certain members (often investors) get a guaranteed return (e.g., 8% annually) before other members receive distributions. Common in real estate LLCs.

Distribution Timing and Amounts

Profits allocation for tax purposes is separate from cash distribution decisions. Key questions to address:

When are distributions made? Monthly, quarterly, annually, or as determined by the manager/members?
Are distributions mandatory? Or can the LLC retain earnings for growth, debt repayment, or reserves?
Tax distributions: LLCs are pass-through entities, meaning members pay taxes on allocated profits even if cash isn't distributed. Many operating agreements require minimum "tax distributions" to cover members' tax bills (typically calculated as allocated profit × highest tax rate).
Disproportionate distributions: Can distributions differ from ownership percentages? Usually not, as this creates tax complications.

Example Scenario

Member A contributes $100,000 cash (70%) and Member B contributes $30,000 cash plus a $20,000 truck (30%). They agree to 60/40 ownership in recognition of B's operational expertise. Profits are allocated 60/40, but Member A receives an 8% annual preferred return on their $100,000 before remaining profits are split. The operating agreement requires quarterly distributions of at least 35% of allocated profits to cover members' estimated taxes, with additional distributions at members' discretion. This structure fairly compensates A's larger capital risk while recognizing B's operational value.

Buy-Sell Provisions and Transfer Restrictions

One of the most critical (and often overlooked) parts of an LLC operating agreement is what happens when a member wants to leave, dies, gets divorced, or goes bankrupt. Buy-sell provisions and transfer restrictions protect remaining members from unwanted partners and ensure smooth ownership transitions.

Why Transfer Restrictions Matter

Without restrictions, a member could sell their ownership interest to anyone, including your competitor, a difficult personality, or someone who doesn't share your vision. You could wake up one morning as business partners with a complete stranger. Transfer restrictions give existing members control over who joins the LLC.

Common Transfer Restriction Provisions

1. Consent Requirement

The simplest restriction: members cannot transfer their interest without written consent of other members (or a specified percentage). You might require unanimous consent, 2/3 majority, or simple majority depending on how protective you want to be.

2. Right of First Refusal (ROFR)

If a member wants to sell to an outside party, they must first offer their interest to existing members on the same terms. This gives remaining members the option to buy out the departing member rather than accepting a new partner.

Example: Member B receives an offer from an outside investor to buy their 30% interest for $150,000. Member B must offer this same deal to Member A first. If A declines within 30 days, B can proceed with the outside sale. If A accepts, they buy B out for $150,000, preventing the new investor from joining.

3. Right of First Offer (ROFO)

Before seeking outside buyers, a member must offer their interest to existing members at a price they determine. This is less restrictive than ROFR because the departing member sets the price rather than bringing in an outside offer.

4. Restrictions on Transfers to Certain Parties

Some agreements prohibit transfers to competitors, creditors, or anyone who isn't a family member or existing member. Others allow gifts to family or transfers to trusts for estate planning but prohibit sales to outsiders.

Buy-Sell Agreement Provisions

Buy-sell provisions specify what happens in specific triggering events. Common triggers include:

Voluntary withdrawal: Member wants to leave the business. Often requires advance notice (30-90 days) and may allow the member to be bought out at less than fair market value if they're breaching non-compete obligations.
Death: Member's heirs inherit the economic interest (right to receive distributions) but not management rights. Remaining members typically have the option to buy out the deceased member's interest within a specified time (e.g., 180 days) at fair market value. Many LLCs purchase life insurance on each member to fund these buyouts.
Disability: If a member becomes permanently disabled and can't perform their duties, the LLC or remaining members may have the option (or obligation) to buy them out. Define "disability" carefully: typically inability to work for 6+ consecutive months.
Divorce: If a member's spouse is awarded part of the membership interest in divorce, existing members usually have the right to purchase that interest. Otherwise, you could end up in business with your partner's ex-spouse.
Bankruptcy: If a member declares bankruptcy, the bankruptcy trustee may try to sell their interest. Your agreement should allow remaining members to buy out the bankrupt member to prevent the trustee or creditors from becoming members.
Termination for cause: If a member breaches the agreement, commits fraud, or engages in criminal activity harmful to the LLC, other members may force a buyout at a discounted valuation.

Valuation Methods for Buyouts

How do you determine the buyout price? Common methods:

Fixed price: Set a specific dollar amount per percentage point of ownership. Simple but requires annual updates to stay accurate.
Book value: Based on the LLC's balance sheet (assets minus liabilities). Easy to calculate but may undervalue profitable businesses with intangible assets like customer relationships or brand value.
Multiple of revenue or EBITDA: Common in service businesses. For example, 1× annual revenue or 4× EBITDA (earnings before interest, taxes, depreciation, and amortization). Industry-specific multiples provide reasonable valuations.
Appraisal: Hire a professional business appraiser to determine fair market value. Most accurate but expensive ($3,000-$10,000+). Consider requiring appraisal only for large buyouts (e.g., interests over 20%).
Shotgun clause: One member names a price, and the other can either buy at that price or sell at that price. This forces fair pricing but only works with two members.

Payment Terms

Few LLCs can afford to pay a large buyout in cash. Your agreement should specify payment terms:

Immediate lump sum (rare except for small interests or life insurance funded buyouts)
Installment payments over 3-5 years with reasonable interest
Down payment (e.g., 20%) with the balance in installments
Acceleration clauses if the LLC is sold or hits certain financial milestones

The departing member may retain a security interest in their former ownership interest until paid in full, allowing them to reclaim it if remaining members default on payments.

Life Insurance Funding

For death buyouts, many multi-member LLCs purchase life insurance on each member. The LLC owns the policies and uses death benefits to fund buyouts. This ensures liquidity when needed most and provides departing families with quick payment rather than multi-year installments.

State-Specific Considerations and Legal Requirements

While operating agreements generally follow similar principles nationwide, each state has unique LLC laws that affect what should be in your agreement. Understanding your state's requirements helps you create a legally sound document.

States That Require Operating Agreements

Most states don't legally require operating agreements, but a few do:

California: Requires LLCs to have a written operating agreement (though there's no penalty for not having one).
Delaware: Doesn't require an operating agreement but strongly encourages it. Delaware's LLC statute explicitly allows oral agreements, but written is always better.
Maine, Missouri, New York: Require operating agreements but don't specify they must be in writing (still, always put it in writing).

Even in states that don't require operating agreements, having one is critical for liability protection, banking relationships, and dispute prevention.

State Default Rules That Apply Without an Operating Agreement

If you don't create your own rules, your state's default LLC statute governs. Common default rules include:

Profit sharing: Many states default to equal profit sharing regardless of ownership percentage or capital contribution. So if one member contributes 90% of capital and another contributes 10%, profits may still be split 50/50 under default rules.
Management: Most states default to member-managed unless you specify manager-managed in your articles of organization or operating agreement.
Voting: Default is often one vote per member (not weighted by ownership percentage) and simple majority rule. This can disadvantage majority owners who expected voting power proportional to their ownership.
Transfer restrictions: Without an agreement, members may be able to freely transfer their economic interests (right to distributions) but not management rights. This means you could end up paying distributions to people you didn't choose as partners.
Dissolution: Some states allow any member to force dissolution at any time. Your operating agreement should require supermajority or unanimous consent to dissolve.

California-Specific Considerations

California has unique LLC requirements:

Annual franchise tax of $800 minimum, plus gross receipts fee for LLCs earning over $250,000
Stricter rules about admitting new members and distributing LLC interests as securities
Community property laws affect married members' ownership
Stronger employee protections that may limit non-compete clauses

Delaware-Specific Considerations

Many businesses choose Delaware for its business-friendly laws:

Maximum flexibility in operating agreement provisions
Extensive case law providing predictability
Specialized Court of Chancery for business disputes
Strong protection of LLC's separate legal existence
No requirement that members or managers be Delaware residents

However, if you operate in another state, you'll need to register as a foreign LLC there and comply with both states' laws.

Series LLC States

Some states (Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, Wisconsin, Kansas, North Dakota, Puerto Rico, and the District of Columbia) allow "Series LLCs": a master LLC with separate sub-series that have their own members, assets, and liabilities. This is popular for real estate investors who want to segregate different properties. Series LLCs require specialized operating agreements addressing both the master LLC and each series.

Community Property States

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska if elected), property acquired during marriage is generally owned equally by both spouses. This affects:

Whether a married member needs spousal consent to sign the operating agreement
What happens to LLC ownership in divorce
Whether both spouses must sign transfer documents

Your operating agreement should address whether LLC interests are separate or community property and require spousal consent for certain actions.

Professional LLCs (PLLCs)

If your LLC provides professional services (law, medicine, accounting, architecture, engineering), many states require a Professional LLC (PLLC) with special restrictions:

All members must be licensed in the profession
Cannot shield members from malpractice liability (only from general business debts)
May require professional liability insurance
Special naming requirements (must include "PLLC" or "Professional LLC")

When to Consult a State-Specific Attorney

While our template covers common provisions, consult an attorney licensed in your state if:

Your LLC operates in multiple states
You have complex ownership structures (preferred returns, profits interests, etc.)
You're forming a Professional LLC
Members are located in different states or countries
Your LLC will hold significant real estate
You plan to raise money from investors or venture capital
You have estate planning concerns (trusts, family succession)

An attorney can ensure your operating agreement complies with state-specific requirements and optimizes your tax and liability protection.

Frequently Asked Questions

Do I need an operating agreement if I am the only member of my LLC?

Yes, even single-member LLCs should have an operating agreement. While most states don't legally require it, an operating agreement is crucial for maintaining your liability protection by demonstrating your LLC is a legitimate separate entity, not just your alter ego. Courts are more likely to "pierce the corporate veil" and hold you personally liable for business debts if you can't show proper separation between yourself and your LLC. Additionally, banks typically require an operating agreement to open business accounts or extend credit. The agreement also helps with estate planning by documenting what happens to your LLC ownership if you die or become incapacitated. It takes less than an hour to create and could save you from personal liability or estate complications.

Can I write my own LLC operating agreement, or do I need a lawyer?

You can create your own operating agreement using our free generator for most simple LLC structures, especially single-member LLCs or straightforward two-person partnerships with equal ownership. Our template includes the essential provisions required in all 50 states. However, you should consult a lawyer if you have complex ownership structures (unequal ownership, special profit allocations, preferred returns), operate in multiple states, are forming a professional LLC (doctors, lawyers, accountants), have family members as co-owners with estate planning concerns, or plan to raise money from investors. An attorney consultation typically costs $500-$2,000 for reviewing or customizing an operating agreement, which is a worthwhile investment for complex situations. For simple LLCs, our template provides a solid foundation that you can always have reviewed by an attorney later if circumstances change.

What is the difference between Articles of Organization and an Operating Agreement?

Articles of Organization (also called a Certificate of Formation in some states) is a public document you file with your state to legally create your LLC. It contains basic information like your LLC's name, address, registered agent, and sometimes management structure. It's typically 1-2 pages and is a public record anyone can access. An Operating Agreement, by contrast, is a private internal document among LLC members that doesn't get filed with the state. It's much more detailed (often 10-20+ pages) and covers ownership percentages, capital contributions, profit distribution, management structure, voting rights, buy-sell provisions, and dissolution procedures. Think of Articles of Organization as your LLC's birth certificate, while the Operating Agreement is your LLC's detailed instruction manual and partnership contract. You need both: Articles of Organization to legally exist, and an Operating Agreement to protect yourself and define how your business operates.

How often should I update my LLC operating agreement?

Review and update your operating agreement whenever significant changes occur: adding or removing members, changing ownership percentages, modifying management structure (switching between member-managed and manager-managed), major capital contributions or distributions, changes in business operations or purpose, relocating to a new state, or changes in members' personal situations (marriage, divorce, estate planning). At minimum, review your agreement annually to ensure it still reflects your business reality and intentions. Many LLCs discover their outdated operating agreement no longer matches actual practice, which can create problems during disputes or audits. Updating is usually simple because your agreement should specify the amendment procedure (typically requiring unanimous or supermajority written consent). Some provisions (especially tax allocations and buy-sell terms) should be reviewed with an accountant or attorney, but straightforward changes like updating addresses or contribution amounts can be amended without professional help using a written amendment signed by all members.

What happens if my LLC operating agreement conflicts with state law?

State LLC statutes typically include both mandatory rules (that cannot be overridden) and default rules (that apply only if your operating agreement doesn't address them). If your operating agreement conflicts with mandatory state law, the state law prevails and the conflicting provision in your agreement is unenforceable. However, most state LLC laws are very flexible and allow operating agreements to customize almost everything. Mandatory rules usually involve basics like: filing requirements, registered agent requirements, minimum standards of member/manager conduct (duty of loyalty, duty of care), creditor rights, and statutory dissolution procedures. Your operating agreement can almost always customize: profit and loss allocations, voting procedures and thresholds, management structure and authority, transfer restrictions, distribution timing, admission of new members, and amendment procedures. If a court finds a specific provision unenforceable, the rest of your operating agreement usually remains valid (this is what the "severability clause" ensures). The best practice is having an attorney licensed in your state review your operating agreement to ensure all provisions comply with state law and accomplish your goals.

Can an LLC operating agreement be oral, or does it have to be in writing?

While some states technically allow oral operating agreements, this is an extremely bad idea that virtually all business attorneys strongly advise against. Here's why you must have a written operating agreement: Memory fades and people remember conversations differently, leading to disputes about what was actually agreed upon. When members have conflicting recollections of profit-sharing terms or management authority, an oral agreement becomes worthless. Banks and lenders require written operating agreements before extending credit or opening business accounts. The IRS wants written documentation of profit allocations, especially for special allocations or tax elections. Courts give far more weight to written agreements in disputes and may not enforce oral agreements under the statute of frauds. Proving an oral operating agreement exists (and what it says) is nearly impossible without written evidence. New members joining later have no reliable way to understand the original terms. Estate planning requires written documentation of what happens to ownership upon death. Transfer restrictions, buy-sell provisions, and valuation methods are far too complex to rely on verbal agreements. Even Delaware, which explicitly allows oral operating agreements in its LLC statute, sees virtually all business LLCs use written agreements. Bottom line: Always put your operating agreement in writing, have all members sign it, and give each member a copy. The few hours spent creating a written agreement can prevent years of costly litigation.

Do all members need to sign the LLC operating agreement?

Yes, all current members should sign the LLC operating agreement. Their signatures indicate consent to be bound by its terms and create a legally enforceable contract among the members. Even in a single-member LLC, you should sign the operating agreement to demonstrate the LLC is a separate legal entity with formal operating procedures (critical for maintaining liability protection). When new members are added later, they should sign either the original operating agreement (if it contemplates future members) or an amended agreement that includes them. Best practices: Have all members sign and date the signature page, with each member receiving a complete executed copy. Consider having signatures notarized (not required but adds authenticity). Keep original signed copies in a safe place and provide copies to your attorney, accountant, and banker. For multi-member LLCs, some attorneys recommend having spouses sign as well (particularly in community property states) to acknowledge the agreement and potential restrictions on transferring ownership. If a member refuses to sign a reasonable operating agreement, seriously reconsider whether you want them as a partner because their unwillingness to agree to basic operating procedures is a major red flag for future conflicts.

What is a capital account, and why does it matter?

A capital account is an accounting record tracking each member's economic interest in the LLC based on their contributions, share of profits/losses, and distributions received. It's essential for tax purposes, buyouts, and dissolution. Here's how it works: When you contribute cash or property to the LLC, your capital account is credited for that amount. As the LLC earns profits, your share is added to your capital account (even if you don't receive a cash distribution). When the LLC distributes cash to you, your capital account is reduced. If the LLC has losses, your share reduces your capital account. Your capital account balance represents your economic stake in the LLC, essentially what you'd receive if the LLC liquidated today. This matters for several reasons: Tax basis: Your capital account (along with your share of LLC debt) determines your tax basis, which affects whether you recognize gain or loss on distributions or sale of your interest. Distributions: Many operating agreements prohibit distributions that would make your capital account negative. Buyouts: When a member leaves, the buyout price is often based partially on their capital account balance. Dissolution: Upon liquidating the LLC, assets are distributed based on capital account balances. Negative capital accounts: If your capital account goes negative (from losses or excess distributions), you may owe a restoration obligation to bring it back to zero upon dissolution. Your LLC should maintain detailed capital account records for each member, updated at least annually. Your accountant typically tracks this when preparing your K-1s for tax filing.

Can I use the same operating agreement for multiple LLCs?

While you might be tempted to reuse an operating agreement template across multiple LLCs, this is risky and not recommended. Each LLC is a separate legal entity with potentially different members, ownership structures, purposes, and operating needs. Here's why you need separate operating agreements: Different ownership: LLC #1 might be 50/50 while LLC #2 is 60/40, requiring different voting rights and distribution provisions. Different purposes: One LLC might hold real estate while another operates a service business, requiring different management structures and dissolution provisions. Different risk profiles: You likely want different liability protections and insurance requirements for each LLC. State law variations: If your LLCs are formed in different states, their operating agreements must comply with different state laws. Commingling concerns: Using identical operating agreements for multiple LLCs makes it easier for courts to "pierce the corporate veil" by treating your LLCs as alter egos of each other rather than separate entities. Legal protection: Customized agreements demonstrate you treat each LLC as a distinct entity with unique operations. That said, you can certainly use the same template as a starting point, then customize it for each LLC's specific situation. Key sections to customize include LLC name, members' names and ownership percentages, purpose of business, management structure, and state law references. Using our generator for each LLC ensures proper customization while maintaining consistent structure.

What is "piercing the corporate veil" and how does an operating agreement prevent it?

Piercing the corporate veil is a legal doctrine where courts ignore the LLC's separate legal existence and hold members personally liable for LLC debts and obligations. It's one of the biggest risks of owning an LLC because it destroys your liability protection, which is the main reason you formed an LLC in the first place. Courts pierce the veil when they believe the LLC is merely the owner's "alter ego" rather than a genuine separate entity. Common reasons courts pierce the veil include: Failure to observe corporate formalities (no operating agreement, no separate bank account, no records), commingling personal and business funds, undercapitalization (starting an LLC with no meaningful assets to cover potential liabilities), using the LLC to commit fraud or hide assets, treating LLC assets as personal property, and failure to identify yourself as acting on behalf of the LLC in contracts. An operating agreement helps prevent veil-piercing by demonstrating your LLC is a legitimate separate entity with formal operating procedures, not just your personal playground. It shows: You established rules for the LLC's operation independent of your personal whims. You maintain separation between yourself and the LLC. You follow proper procedures for major decisions and distributions. The LLC has its own governance structure and isn't just "you doing business." Other critical steps to prevent veil-piercing include: Maintain separate bank accounts, never pay personal expenses from the LLC account, sign contracts in your capacity as "Member" or "Manager" (not personally), maintain adequate business insurance, keep good records and file required reports, capitalize the LLC adequately for its business, and hold annual meetings or document decisions via written consent. An operating agreement is just one piece, but it's the foundation that demonstrates you treat your LLC as a real business entity.

How do LLC operating agreements affect taxes?

Your LLC operating agreement significantly affects how your business is taxed, how profits and losses are allocated, and what information you report to the IRS. Here's what you need to know: Default tax treatment: Single-member LLCs are taxed as disregarded entities (like sole proprietorships) by default. Multi-member LLCs are taxed as partnerships by default. Your operating agreement doesn't change this default but does support it by documenting ownership structure. Election to be taxed as a corporation: Your LLC can elect to be taxed as an S-Corporation or C-Corporation by filing Form 2553 or Form 8832 with the IRS. Your operating agreement should support this election and address how it affects distributions and compensation. Profit and loss allocations: For partnerships (multi-member LLCs), the IRS allows you to allocate profits and losses differently than ownership percentages if your operating agreement specifies special allocations. However, these must have "substantial economic effect." You can't just manipulate allocations to minimize taxes without economic reality backing them up. Tax distributions: Many operating agreements require the LLC to distribute enough cash to members annually to cover their tax liability on allocated profits, since members pay taxes on their share of LLC profits even if cash isn't distributed. Without this provision, members can get stuck paying taxes on "phantom income." Capital accounts: The IRS requires LLCs taxed as partnerships to maintain capital accounts according to specific rules. Your operating agreement should describe the capital account maintenance method. Basis and at-risk limitations: Members can only deduct LLC losses up to their basis (capital account plus share of LLC debt). Your operating agreement's provisions on capital contributions, distributions, and debt guarantees all affect basis. Audit and tax procedure: Your operating agreement should designate a "tax matters partner" (now called "partnership representative") who handles IRS communications and audits. Bottom line: Work with a CPA when drafting operating agreement provisions related to profit allocations, distributions, and tax elections to ensure they achieve your tax goals while complying with IRS rules.

Can I amend my LLC operating agreement, and how?

Yes, you can amend your LLC operating agreement at any time, but the amendment process must follow the procedures outlined in your existing agreement. Most operating agreements require written consent from either all members (unanimous), a supermajority (typically 2/3), or a simple majority, depending on what the agreement specifies. Critical amendments (like changing ownership percentages, altering profit allocations, or modifying transfer restrictions) typically require higher thresholds than routine updates (like changing the principal office address). Here's the proper amendment process: Review your current agreement to find the amendment clause, which specifies what approval level is required. Draft a written amendment clearly stating what provisions are being changed, added, or deleted. Get the required approval from members via written consent or a formal vote at a member meeting. Have all consenting members sign and date the amendment. Attach the amendment to your original operating agreement (don't just make handwritten changes to the original). Give copies of the executed amendment to all members and keep the original in your LLC records. Notify your bank, accountant, and attorney of material changes. Consider whether you need to file any updated documents with your state (usually not required for internal operating agreement amendments, but check your state's rules). For significant changes, some LLCs prefer to restate the entire operating agreement (creating an "Amended and Restated Operating Agreement") rather than accumulating multiple amendments. This creates one clean document incorporating all changes. Common reasons to amend include: adding or removing members, changing ownership percentages, modifying management structure, updating capital contribution requirements, changing profit distribution methods, adding or removing transfer restrictions, adjusting voting thresholds, updating contact information, or correcting errors in the original agreement. Keep all amendments permanently with your LLC records. You may need to show the evolution of your agreement during audits, disputes, or when selling the business.

What should I do with my LLC operating agreement after I create it?

Creating your operating agreement is just the first step. Here's what you must do to make it effective and maintain its value: Have all members sign and date it: Without signatures, it's just a draft proposal, not a binding agreement. Consider notarizing signatures for added authenticity, especially for large LLCs or those with valuable assets. Give each member a complete executed copy: Everyone should have the same signed version. Keep the original in a secure location (fireproof safe, safe deposit box, or with your attorney). Provide copies to key third parties: Your attorney should have a copy for legal advice and defense. Your accountant needs it for tax planning and K-1 preparation. Your bank may request it when opening accounts or applying for loans. Your insurance agent might need it to properly structure business insurance. If you have a buy-sell agreement funded by life insurance, your insurance agent needs it. Store it with your other LLC documents: Keep your operating agreement with Articles of Organization, EIN letter, business licenses, annual reports, member meeting minutes, written consents, amendments, and tax returns. Many LLCs maintain an "LLC binder" with all organizational documents. Review it annually: Set a calendar reminder to review your operating agreement every year to ensure it still reflects your business reality and member intentions. Update it when circumstances change: Amend immediately when you add/remove members, change ownership, alter management structure, or make other significant business changes. Follow it consistently: Your operating agreement only protects you if you actually follow it. If it requires annual meetings, hold them. If it specifies how distributions are made, follow that process. Inconsistency between your agreement and actual practice can lead to veil-piercing or invalidation of key provisions. Share relevant provisions with employees and contractors: While you don't need to share your entire agreement, employees and contractors should know who has authority to hire, fire, and sign contracts on behalf of the LLC. Back it up: Keep digital copies in secure cloud storage as backup in case the physical copy is lost or destroyed in a disaster. Train new members: When admitting new members, make sure they read and understand the operating agreement before signing. Have them initial key provisions (especially transfer restrictions, buy-sell terms, and non-compete clauses) to demonstrate informed consent. Your operating agreement is a living document that should be actively used and maintained, not filed away and forgotten.

Do I need separate agreements for non-compete, confidentiality, or employment terms?

It depends on your situation, but in most cases you should have separate agreements rather than trying to cover everything in your LLC operating agreement. Here's why and when you need separate agreements: Non-Compete Agreements: While your operating agreement can include basic non-compete provisions among members, dedicated non-compete agreements are often necessary for employees, contractors, and key personnel who aren't LLC members. Non-compete enforceability varies dramatically by state. California largely prohibits them, while other states enforce them if reasonable in scope, geography, and duration. A separate non-compete agreement allows you to customize terms for different people (you might accept broader restrictions from a managing member than from a junior employee) and makes enforcement easier in court. Confidentiality/NDA Agreements: Your operating agreement should include confidentiality obligations among members regarding LLC business information, but you need separate NDAs for: employees who access trade secrets, contractors and vendors who receive proprietary information, potential investors during due diligence, potential buyers if you're selling the business, and partners in joint ventures or strategic relationships. These outside parties aren't bound by your operating agreement, so you need separate contracts. Employment Agreements: Absolutely keep these separate from your operating agreement. Employment agreements with member-employees should cover: job title and responsibilities, compensation and benefits, termination procedures, intellectual property assignment, non-compete and non-solicitation terms, and dispute resolution. Mixing employment terms into the operating agreement creates confusion about which document governs and complicates amendments. Buy-Sell Agreements: Some LLCs include buy-sell provisions in the operating agreement (which our template does), but others prefer separate buy-sell agreements, especially when funded with life insurance or involving complex valuation formulas. Separate agreements can be more easily amended without revising the entire operating agreement. Partnership Agreements with Other Businesses: If your LLC is partnering with other companies, those relationships need separate written agreements. Your operating agreement only governs internal LLC operations. The golden rule: Your LLC operating agreement governs relationships among LLC members and internal LLC governance. Separate agreements are needed for relationships with non-members (employees, contractors, vendors, customers) and for specialized topics that require detail beyond what fits in an operating agreement. However, your operating agreement should reference that members may be subject to additional agreements (employment agreements, non-competes, etc.) and specify that those agreements are in addition to, not in place of, the operating agreement.

What is the difference between ownership percentage and voting rights in an LLC?

Ownership percentage and voting rights are related but distinct concepts in LLC governance, and understanding the difference is critical for structuring your operating agreement fairly. Ownership Percentage (Economic Interest): This represents each member's share of the LLC's economic value, their claim on profits, losses, and assets upon dissolution. If you own 40% of an LLC, you typically receive 40% of profits, bear 40% of losses, and get 40% of assets if the LLC is sold or liquidated. Ownership percentage is what you "own" in the economic sense. It affects: profit and loss allocations, distribution amounts, buyout value if you leave, capital account balance, and what you receive upon dissolution. Voting Rights (Management Interest): This represents each member's power to make decisions about LLC operations. Voting rights can be structured several ways: Per capita (one vote per member): Every member gets one vote regardless of ownership percentage. Common in small professional practices where all partners are equals. Proportional to ownership: Your vote equals your ownership percentage. A 60% owner has 60% voting power. This is most common in investment-driven LLCs. Custom voting: You can give certain members extra voting power beyond their ownership. For example, a founder might retain 51% voting control despite owning only 30% economically. Why separate them? Several situations justify splitting economic and voting interests: Rewarding sweat equity: An operating founder might get 50% voting control despite contributing less capital (only 30% ownership) because they run the business day-to-day. Protecting investors: A passive investor might contribute 60% of capital but accept only 40% voting rights, trusting the operator to make business decisions. Maintaining control: A founder might sell 49% economic ownership to raise capital while retaining 51% voting control to prevent investor interference. Vesting schedules: New members might receive full economic ownership immediately but earn voting rights over time as they prove their value. Your operating agreement should clearly specify: Is voting proportional to ownership or per capita? Are there different classes of membership with different voting rights? What decisions require what level of approval (simple majority, supermajority, unanimous)? Do some members have veto power over certain decisions? Most states allow you to structure voting rights however you want in your operating agreement, as long as you document it clearly. Work with an attorney to ensure your voting structure is legal in your state and accomplishes your goals. Whatever you choose, transparency is critical: all members should understand and agree to the voting structure before joining.