When starting a business, one of the most important documents you can create is an Operating Agreement. This legal document outlines the ownership structure, management responsibilities, and operational guidelines for your company—especially if you’re forming a Limited Liability Company (LLC).
Although an Operating Agreement is not always required by law, having one can help prevent disputes, clarify ownership percentages, and provide a clear roadmap for decision-making within the business.
An Operating Agreement is a contract between the owners (members) of an LLC that defines how the business will be run. It typically includes details on:
✅ Ownership structure – How much of the business each member owns
✅ Voting rights and decision-making – How key business decisions will be made
✅ Profit and loss distribution – How earnings and expenses are shared among owners
✅ Management structure – Whether the business is managed by the owners or designated managers
✅ Rules for adding or removing members – What happens if a member wants to leave or if new partners join
✅ Dissolution terms – How the business will be handled if it needs to close
Even if you are a single-member LLC, an Operating Agreement is still beneficial as it helps separate your personal and business finances, reinforcing your limited liability protections.
Equity and ownership are typically defined by the percentage of the business each member owns. Ownership percentages can be determined in several ways:
The most common method is assigning ownership based on how much money or assets each member contributes. For example:
Alice contributes $60,000 to start the business
Bob contributes $40,000
Alice owns 60% of the LLC, and Bob owns 40%
In some cases, ownership is also assigned based on time, effort, or expertise contributed to the business rather than just financial investment. This is common in startups where one partner provides funding and another provides labor.
If multiple members are starting a business together and want equal control, they may decide on a 50/50 or 33/33/33 split, even if contributions are not exactly equal.
Some LLCs create unique ownership structures that reflect a mix of financial, intellectual, and operational contributions. These details should be clearly defined in the Operating Agreement to avoid disputes later.
Without an Operating Agreement, your business may default to state laws that dictate ownership and management rules, which may not align with what you and your partners want. A well-written agreement:
✔️ Protects member interests – Clearly defines roles and expectations
✔️ Prevents conflicts – Reduces misunderstandings over money and decision-making
✔️ Enhances legal protection – Reinforces the LLC structure and liability protections
While you don’t need a lawyer to draft an Operating Agreement, it’s always a good idea to consult with a legal or financial professional to ensure it aligns with your business goals.
An Operating Agreement is a vital document for any LLC that helps define ownership, management, and financial structures. Whether you’re a solo entrepreneur or part of a multi-member LLC, having a solid agreement in place can help protect your business and provide clarity for the future.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult with a qualified attorney for specific guidance on drafting an Operating Agreement for your business.