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LLC Operating Agreement: Why It’s Important To Have One

LLC Operating Agreement: Why It’s Important To Have OneOne of the things that makes a limited liability company more flexible to operate than a C corporation or S corp is the LLC operating agreement. This agreement is one of the fundamental business contracts you’ll want to have in place if you own or co-own an LLC’s equity.


The operating agreement, sometimes referred to as an LLC membership agreement replaces the stiff formalities of corporate bylaws and shareholders’ agreements (and related meetings, resolutions, etc.) with a single blueprint signed by the limited liability company’s members (equity owners) that states how the members have agreed their LLC should be run.

Should You Have An Operating Agreement If Your State Doesn’t Require One?

Even if your state doesn’t mandate an operating agreement, it’s a good idea to have one for two primary reasons:

(1) financial institutions and other third parties will want to see a copy of your operating agreement before doing business with you (e.g. opening a bank checking account); and

(2) the operating agreement reduces the likelihood of disputes when there are multiple owners because the agreement makes it clear how the company will be operated, what triggers an equity sale (e.g. a member’s death), and other key issues.

Are The Terms Of An LLC Membership Agreement The Same For Every Limited Liability Company?

No. Because the goals for your business are unique to you, there are LLC terms and conditions that will vary from other operating agreements.

For example, you may choose to have the members manage the company. This is very common if the LLC is owned by 1-3 members. On the other hand, you may want to have a single manager instead, particularly where some members are merely passive investors.

In addition, you might elect to have the LLC treated by the U.S. Internal Revenue Service (IRS) as if it were a Subchapter S corporation for federal taxation purposes. Or, depending upon your circumstances, you might choose to have the IRS treat your LLC as a pass-through entity (a sole proprietorship for a single member LLC or a partnership for a multi-member limited liability company) for taxation purposes.

Your choices in these and other matters will be reflected in the language your business lawyer uses to prepare your LLC operating agreement.

Where Do You Get An LLC Operating Agreement?

Business Attorney Mike Young prepares operating agreements (a.k.a. membership agreements) for new and existing limited liability companies. If you need an agreement for your LLC, contact us today for a flat fee quote.

Mike Young, Esq.

Author Mike Young, Esq.

Mike Young has been practicing business and technology law since 1994 and is an angel investor in startups. He's been an entrepreneur since 1988. To get legal help from Attorney Young, click here now or call 214-546-4247 to schedule a phone consultation.

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