When forming a Limited Liability Company (LLC), one of the most important but often overlooked steps is creating an operating agreement. While some states don’t legally require it, having this document in place is a critical move for protecting your business and preventing disputes down the road.
If you’re wondering how to create an operating agreement, this guide will walk you through everything you need to know—from what it is, why it matters, and how to write one that covers all the essential elements of your business.
What Is an Operating Agreement?
An operating agreement is a legally binding document that outlines the ownership structure, management roles, and operating procedures of your LLC. It acts as the internal rulebook for your business, defining how decisions are made, how profits are distributed, and what happens if a member leaves the company.
Even in states where it’s not required (like California or Texas), having an operating agreement can help establish your LLC’s legitimacy and protect your limited liability status.
Why You Need an Operating Agreement
You might be tempted to skip this step—especially if you're the sole owner of your LLC. But here’s why creating an operating agreement is a smart business move:
- Defines roles and responsibilities among members
- Prevents future conflicts between co-owners
- Strengthens liability protection by proving separation of personal and business affairs
- Clarifies profit distribution and reinvestment rules
- Outlines exit strategies and ownership transfer rules
- Required by some banks and investors to open accounts or secure funding
Whether you're a solo entrepreneur or launching a business with partners, learning how to create an operating agreement early on gives your business a solid legal foundation.
When Should You Create an Operating Agreement?
The best time to create your operating agreement is immediately after forming your LLC. Some states may even require you to draft one as part of the registration process.
If you're using a formation service like Smart Filing, you can incorporate the operating agreement into your LLC application process—saving time and reducing the chance of errors.
How to Create an Operating Agreement in 6 Easy Steps
1. List LLC Members and Their Ownership Stakes
Start by identifying all members (owners) of the LLC. Specify each member’s ownership percentage, which is typically based on their capital contribution or negotiated terms.
Example:
- Member A: 60% ownership
- Member B: 40% ownership
This section should also clarify how voting rights are distributed—equal per member or proportional to ownership.
2. Define Management Structure
LLCs can be member-managed or manager-managed:
- Member-managed: All owners participate in day-to-day operations.
- Manager-managed: Designated manager(s), who may or may not be members, handle operations.
Choose the structure that fits your business model and outline the responsibilities of each person involved.
3. Explain Profit and Loss Distribution
Clarify how profits and losses will be divided among members. This is usually done based on ownership percentage, but you can allocate them differently as long as all members agree.
Also include:
- How and when distributions are made
- Reinvestment policies
- Handling of tax obligations
4. Establish Rules for Decision-Making
Your operating agreement should explain how business decisions are made, including:
- Voting procedures
- Quorum requirements for major decisions
- Tie-breaker methods
- Authority to sign contracts or authorize spending
This section is key to maintaining operational clarity, especially as your LLC grows.
5. Include Buyout, Exit, and Dissolution Procedures
Plan ahead for unexpected changes. This section should address:
- What happens if a member wants to leave
- How ownership is transferred or sold
- Conditions that trigger dissolution of the LLC
- Member death or bankruptcy
By including these clauses, you avoid legal complications and financial uncertainty later on.
6. Add Miscellaneous Legal Provisions
Consider including these final clauses to ensure completeness:
- Amendments and updates to the agreement
- Governing law (which state laws apply)
- Conflict resolution methods (e.g., mediation or arbitration)
Once completed, all members should review and sign the agreement. You don't need to file it with the state, but keep it with your business records.
Can I Use a Template?
Yes, you can use an LLC operating agreement template—but make sure to customize it for your specific business and state laws. Templates are helpful starting points, but generic documents may not cover your unique needs.
At Smart Filing, we provide customizable templates and guided support to help you create an operating agreement that aligns with your LLC formation and business goals.
How Smart Filing Helps
Creating an operating agreement can be daunting, especially if you're unfamiliar with legal jargon. Smart Filing simplifies the process by:
✅ Including an operating agreement in select LLC formation packages
✅ Offering step-by-step guidance to customize your document
✅ Ensuring compliance with state-specific requirements
✅ Providing peace of mind that your agreement is legally sound
Whether you're applying for an LLC or just want help drafting the agreement, we’ve got your back.
Frequently Asked Questions
Is an operating agreement required by law?
Not in every state, but it’s strongly recommended to have one for legal protection and operational clarity.
Do I need an operating agreement if I’m the only owner?
Yes. A single-member LLC should still create an operating agreement to reinforce the separation between personal and business activities.
Can I change my operating agreement later?
Yes. You can amend your agreement as your business evolves—just make sure all members approve and sign the changes.
Final Thoughts: How to Create an Operating Agreement
If you're forming an LLC, understanding how to create an operating agreement is essential to building a strong legal and operational foundation for your business. It may not be legally required everywhere, but it’s a best practice that protects both you and your company.
By including ownership terms, management duties, profit distributions, and exit plans, your operating agreement ensures that everyone is on the same page from day one.
Ready to Form Your LLC and Create Your Operating Agreement?
Smart Filing makes it easy to form your LLC and create an operating agreement that meets legal standards and fits your business structure. Save time, reduce stress, and build your business the smart way.