What Is a Business Operating Agreement & Is It Necessary for Your LLC? [2025 Edition]  

Starting an LLC is an exciting step in building your business, but there are a few legal pieces of the puzzle that need to come together. One of the most important, yet often overlooked, documents is the Business Operating Agreement. You may have heard of it but might not be sure what it is or if it’s even necessary for your LLC. Don’t worry; we’re here to break it down and help you understand what a business operating agreement is, why it matters, and whether it’s something you really need for your business.

What Exactly Is a Business Operating Agreement? 

A business operating agreement is a legal document that outlines the rules, responsibilities, and overall operations of your Limited Liability Company (LLC). It’s like a contract between the members (owners) of the LLC that lays out how the business will run on a day-to-day basis, how profits and losses will be distributed, how decisions will be made, and what happens if a member wants to leave or if the company is dissolved. For businesses looking to streamline their documentation or enhance their branding materials, The Mines Press offers a variety of professional printing solutions tailored to meet your company’s needs.

Although your LLC may not be required by law to have an operating agreement in some states, it’s still one of the best ways to ensure everyone is on the same page and avoid misunderstandings down the road.

Key Components of a Business Operating Agreement 

Although there aren’t any specific rules on how business operating agreements should be written, there are a few crucial sections that should be included:

• Ownership Structure: Who owns the business, and how much of the company does each member own?
• Management Structure: Is the LLC managed by its members, or will you hire a manager to handle operations?
• Profit and Loss Distribution: How will profits and losses be shared among members?
• Voting Rights: What are the voting powers of each member when it comes to business decisions?
• Dispute Resolution: What happens if there’s a disagreement between members? This section lays out how conflicts will be handled.
• Membership Changes: What happens if a member wants to sell their share, retire, or pass away? This section clarifies what will happen to their interest in the company.
• Dissolution Procedures: If you ever decide to close your business, this section will provide the steps for winding down the LLC.

Is a Business Operating Agreement Necessary for LLCs? 

LLCs registered in the states of California, Delaware, Maine, Missouri, and New York are all legally required to have an operating agreement.

While other states don’t require LLCs to have an operating agreement, it’s still highly recommended that you create one. Find out why below. 

Pros & Cons of a Business Operating Agreement

As with any business decision, creating a business operating agreement comes with both benefits and potential drawbacks. Let’s explore the pros and cons to help you decide if it’s right for your LLC.

What Happens If You Don’t Have a Business Operating Agreement?

If your LLC doesn’t have a business operating agreement, your LLC will still function under your state’s default rules for LLCs. However, these rules may not reflect the needs or preferences of you and your partners. This means you could face issues like:

• Default Profit Sharing: Without an operating agreement, profits and losses will likely be split evenly among LLC members, even if that’s not what you want.
  
• State-Defined Roles: Your state’s default rules may not align with how you intend to manage the business. For example, you might want a more flexible management structure than what state laws dictate.
  
• Disputes: Without a formal agreement, resolving disagreements could be more difficult, potentially leading to costly legal battles or dissolving the LLC altogether.

5 Easy Steps to Set Up an LLC Operating Agreement

Setting up an LLC operating agreement doesn’t have to be complicated. Here are five simple steps to get started:

1. Choose Your LLC Structure: Decide if your LLC will be member-managed (all owners are involved in operations) or manager-managed (a manager runs the business).

2. Define Ownership and Profit Distribution: Specify who owns what percentage of the LLC and how profits and losses will be shared among members.

3. Outline Roles and Responsibilities: Clarify each member’s role and responsibilities, such as who manages marketing, finances, or day-to-day operations.

4. Set Voting Rights and Decision-Making: Decide how major decisions will be made, whether by majority vote or unanimous consent, and establish the process for voting.

5. Plan for Changes and Dissolution: Detail what happens if a member leaves, sells their share, or if the LLC is dissolved, ensuring a smooth transition.

Conclusion

When starting a new business, it’s easy to get caught up in the excitement of envisioning success. However, building a strong foundation is key to turning those dreams into reality. Taking the time to create a comprehensive LLC operating agreement may not feel like the most thrilling step, but it’s one of the most important actions you can take to protect your business and ensure smooth operations as it grows.

We hope this article has given you a clear understanding of what an operating agreement is, why it’s essential for your LLC, and how it can set you up for long-term success.

As you move forward, remember to tailor the operating agreement to meet your LLC’s unique needs. And, if necessary, don’t hesitate to consult with an attorney to ensure everything is properly covered. A solid operating agreement now can save you countless headaches down the road and provide the peace of mind that your business is well-protected and set for success.

Business Operating Agreement FAQs