What is an Operating Agreement?

An operating agreement is a legal document that outlines the operations of an LLC and establishes the agreements between the members of the business. Essentially, it puts on paper what is expected of each member and clarifies what will happen under various situations or when there is an operational dispute between the members.

For example, let’s say there are three members to the business but after a few years one of them wants to sell his interest. What do the other members do? This is something that would be outlined in the operating agreement.

Another point you’ll want in the operating agreement is how profits are distributed. Just because a member owns more equity in the business doesn’t always mean he must get a bigger share of the profits. This is something that would be clearly described in the operating agreement.

How about if the members decide to close the business? This is often a tricky situation, with lots of emotion involved. How are assets distributed? What happens to the money that is generated from the sale of the assets? You’ll want this clearly defined in the operating agreement.

There are many other aspects that should be considered besides the examples given, but the point is, an operating agreement is as the name suggests: an agreement. Though they may not be required by law, I can’t stress how important and valuable they are for your business and your sanity

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