If you’re starting an LLC, someone’s going to eventually bring up the term “operating agreement.” It sounds like legal mumbo-jumbo (which is sort of is) but think of it more as the rulebook for your business… who owns what, who decides what, and what happens if things get messy. Getting this right early on will save you a ton of headaches down the road.
So, what is it, exactly?
An operating agreement is basically a private document that your business keeps on file. It spells out how your LLC is owned and run. Unlike your business registration, you don’t file it with the state, it’s just for you and your partners (and anyone else who needs to see it, like an attorney, bank or investor).
Do you need one?
Short answer: almost certainly yes.
If you have a business partner, it’s non-negotiable. Without one, your state’s default rules kick in, and those rarely match what you and your co-founder actually agreed to over coffee. If you’re a solo founder, you’re not legally required to have one in most states, but banks, landlords, and investors will often ask for it. It also helps prove your LLC is a real, separate business, which is the whole point of forming one.
You’ll also want one updated and ready when you raise money, bring on new partners, or just want to sleep at night knowing things are sorted.
What’s in it?
Most operating agreements cover the same core things:
- Who owns what (cap table), ownership percentages, what each person put in (cash, time, equipment, ideas)
- How decisions get made, do you vote on everything together, or does one person run day-to-day operations?
- How much you get paid, very common to define compensation and distributions for managing members to avoid arguments over pay
- How money flows, when profits get paid out and how they’re split
- What happens if someone wants out, buying someone out, what happens if a partner passes away or gets divorced, rules around selling ownership stakes
- How the company ends, if you ever shut things down, how do you divide assets?
There’s more detail in each section, but those are the pieces that tend to matter most for early-stage businesses.
Why founders skip it (and wish they hadn’t)
Most founders skip the operating agreement because “we all trust each other.” That’s great! Write it down anyway. Two years in, when one partner wants to leave, or you can’t agree on whether to take a big contract, or the IRS has a question, you’ll want something on paper that reflects what you agreed to.
A basic operating agreement can cost $500–$2,000 with a good attorney, or less if you start with a solid state-specific template. Either way, it’s one of the best investments you’ll make early on.
How to get it done
- Find a state-specific template to use as a starting point (don’t just sign a generic one you found online)
- Sit down with your co-founders and work through the hard questions while things are still easy
- Have a business attorney look it over, especially if your ownership split isn’t 50/50, or you have more than two people involved
- Sign it before you open your business bank account
The bottom line
Your operating agreement isn’t about expecting things to go wrong. It’s about making sure everyone’s on the same page while things are going right, so that if anything ever changes, you’ve already got a plan.
Got questions about your specific situation? Drop them in the comments, whether you’re in Ohio, California, or anywhere else. Happy to help point you in the right direction.