An LLC Operating Agreement is a comprehensive internal governance document that defines the ownership structure, management framework, financial arrangements, and operational procedures for a multi-member limited liability company. This agreement functions as the LLC equivalent of corporate bylaws and a shareholders' agreement combined, establishing the rules that govern how members interact, how decisions are made, how profits and losses are allocated, and how disputes are resolved among the owners.

The legal foundation for operating agreements rests on state LLC statutes. The Revised Uniform Limited Liability Company Act (RULLCA), which serves as the model for many state laws, grants operating agreements broad authority to override default statutory provisions, making the operating agreement the primary governing document for the LLC. New York LLC Law Section 417 and California Corporations Code Section 17701.10 explicitly require written operating agreements, while Delaware's LLC Act (Title 6, Chapter 18) provides maximum flexibility, allowing members to structure their operating agreement with minimal statutory constraints.

Without an operating agreement, the LLC defaults to state statutory provisions that may not reflect the members' actual intentions. Default rules typically allocate profits and losses equally regardless of capital contributions, require unanimous consent for major decisions, and may allow any member to dissolve the LLC at will. These defaults frequently create disputes among members who assumed their arrangement would operate differently. An operating agreement replaces these defaults with customized terms reflecting the members' actual business understanding.

The operating agreement also serves as critical evidence supporting the LLC's separate legal identity. Under the alter ego and piercing the corporate veil doctrines, courts may hold members personally liable for LLC debts if the company lacks formal governance structures. A comprehensive operating agreement demonstrates that the members treat the LLC as a separate entity, strengthening the limited liability protection that is the primary reason for choosing the LLC structure.

An LLC Operating Agreement is essential in several business formation and operational scenarios. Two or more individuals are forming an LLC together and need to document their respective ownership percentages, capital contributions, management roles, profit-sharing arrangements, and decision-making authority before the business begins operations. Waiting to address these terms after the business is running often leads to disputes when members have different expectations.

Business partners are contributing unequal amounts of capital, services, or intellectual property to the LLC and need to ensure that ownership interests and profit allocations reflect each member's actual contribution rather than defaulting to the state's equal-split rule. A member is contributing property or services rather than cash, requiring agreed-upon valuations to be documented for both tax purposes under IRC Section 721 and member equity calculation.

The LLC members want to restrict the transferability of membership interests to prevent unwanted third parties from becoming members without the consent of existing members. Without an operating agreement, default state law may allow free transferability of economic interests, potentially admitting individuals the other members did not approve. An LLC is designating certain members as managers while other members remain passive investors, requiring clear delineation of management authority, voting rights, and fiduciary duties.

Members need to establish buyout procedures for when a member wants to leave the LLC, retires, becomes disabled, or dies. Without agreed-upon buyout terms, valuation methods, and payment structures, a departing member's exit can force the dissolution of the entire business. The operating agreement provides mechanisms for membership transfers, right of first refusal provisions, and valuation formulas that keep the business operational during ownership transitions.

A comprehensive multi-member LLC Operating Agreement must address several critical governance areas. The membership and capital section should document each member's name, initial capital contribution (cash, property, or services with agreed valuations), ownership percentage, and any obligation to make additional contributions. Specify whether membership interests are divided into classes with different voting or distribution rights, similar to preferred and common stock in a corporation.

Profit and loss allocation provisions must specify how the LLC distributes profits and losses among members. While pro-rata allocation based on ownership percentage is most common, members may agree to special allocations, provided they satisfy the substantial economic effect test under IRC Section 704(b) and Treasury Regulation Section 1.704-1(b). Distribution frequency, minimum distribution requirements for tax liability coverage, and the distinction between guaranteed payments (IRC Section 707(c)) and profit distributions should be clearly defined.

Management structure provisions must establish whether the LLC is member-managed (all members participate in management) or manager-managed (designated managers control operations). Define voting thresholds for ordinary business decisions (typically majority) versus major decisions requiring supermajority or unanimous consent, such as admitting new members, selling substantial assets, incurring debt above a threshold, or amending the operating agreement. Include fiduciary duty provisions addressing duty of loyalty, duty of care, and the extent to which these duties may be modified under state law.

Transfer restriction and buyout provisions should establish restrictions on voluntary transfers of membership interests, right of first refusal procedures, and tag-along and drag-along rights. Include buy-sell provisions triggered by death, disability, retirement, or voluntary withdrawal, specifying the valuation method (book value, appraised fair market value, formula-based, or agreed value), payment terms, and funding mechanisms such as life insurance policies. Dissolution provisions should define the events triggering dissolution, the vote required to continue the LLC after a triggering event, and the wind-up and liquidation procedures. Finally, include dispute resolution mechanisms specifying mediation followed by binding arbitration, governing law, and amendment procedures.