What Is an LLC Operating Agreement? What to Include and Why

An LLC operating agreement is the internal rulebook for your company: who owns what, who decides what, how money moves, and what happens if an owner leaves. Most states do not require one — but running an LLC without it is a costly mistake.

This guide explains what an operating agreement is, why even a one-person LLC should have one, and the clauses that actually protect you.

🏢 LLC Operating / Partnership Agreement

Starting a company with co-owners, taking on a business partner, or setting up your LLC — and you need the agreement that says who owns what and who runs it? An operating agreement — also called an LLC operating agreement, a multi-member (or single-member) operating agreement, a partnership agreement, or a shareholder / buy-sell agreement — is the DEFINITIVE governance contract the owners of a company sign to set out ownership, capital, management, profit / loss sharing, transfers and what happens when someone leaves. It's the internal constitution of the business (distinct from the deal-side LOI or purchase agreement), and it's what a partnership / joint-venture letter of intent matures into. PaperKit builds the right one: pick the entity — MULTI-MEMBER LLC, SINGLE-MEMBER LLC, GENERAL PARTNERSHIP, or LIMITED PARTNERSHIP (this sets the title and whether the owners are Members or Partners) — then pick how it's run, which rewrites the management section: MEMBER-MANAGED (the owners run it), MANAGER-MANAGED (appointed managers run it), or PARTNER-MANAGED. Then just add the owners in a table — each one's name, capital contribution and ownership % — and it does the math: total capital, and if you leave the percentages blank it splits ownership in proportion to what each owner puts in, always totalling up. Every clause an operating agreement expects is laid out and toggleable: formation & name, purpose, principal office & registered agent, term, capital contributions & the ownership table, capital accounts, additional capital / capital calls, allocations & distributions (pro-rata or as agreed), management & the reserved 'major decisions', voting, books, records & tax treatment, transfer restrictions with a right of first refusal & buy-sell, admission & withdrawal of owners, dissolution & winding-up, indemnification & limited liability, an optional owner non-compete & confidentiality, and optional binding arbitration — plus governing law and extra terms. It's self-drafted: the organizing owner reviews and e-signs online, every other owner signs on their printed signature line, and you download the clean PDF, with an optional notary block. (This is a template, not legal advice; LLC and partnership statutes, tax elections, securities rules and fiduciary duties vary by state and by entity — confirm yours before relying on this form.)

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What an operating agreement does

An operating agreement sets the ownership percentages, management structure, and financial and voting rules of an LLC. It is a private contract among the members — you file your articles of organization with the state, but the operating agreement stays internal.

Without one, your LLC falls back on your state's default rules, which are generic and may not match what you and your co-owners actually intend.

Why even a single-member LLC needs one

A solo owner might ask why they need an agreement with themselves. The answer is liability protection: a signed operating agreement is key evidence that your LLC is a separate entity, helping preserve the "corporate veil" that shields your personal assets.

Banks and investors also frequently ask to see one before opening accounts or funding the business.

Key clauses to include

A solid operating agreement covers the decisions that cause disputes later:

Members and their ownership percentages and capital contributions.
Management: member-managed or manager-managed, and voting thresholds.
How profits and losses are allocated and distributed.
How new members are admitted and how a member can exit.
Buy-out terms and valuation if an owner leaves, dies, or is bought out.
Dissolution — how the company is wound down.

Keep it current and signed

An operating agreement is only useful if it reflects reality. Update it when ownership changes, when you add members, or when you switch management structure — and have every member sign each version.

Store the signed agreement with your company records. You will need it when opening bank accounts, raising money, or settling any dispute among owners.

Frequently asked questions

Is an LLC operating agreement legally required?

Only a handful of states require one, but every LLC should have one. It governs how the business runs and helps protect your limited-liability status even where the state does not mandate it.

Does a single-member LLC need an operating agreement?

Yes. It reinforces that the LLC is separate from you personally — important for liability protection — and banks often require it to open a business account.

Can I write my own operating agreement?

Yes. Many LLCs, especially single-member and small multi-member ones, use a well-structured template. For complex ownership or outside investors, have an attorney review it.

How do I create an LLC operating agreement?

Use PaperKit's free LLC Operating / Partnership Agreement maker to generate an agreement covering ownership, management and buy-out terms, then have all members sign it.

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