When you form an LLC, most states only require you to file Articles of Organization. The operating agreement is optional — legally. In practice, operating without one means your LLC is governed by your state's default LLC statute, which makes blunt assumptions about ownership, profit distribution, and decision-making that may have nothing to do with your actual arrangement.
What default rules look like in practice
Here's what most states' default LLC rules assume, absent an operating agreement:
- Profits and losses are split equally among members, regardless of capital contributed
- All members have equal voting rights, regardless of ownership percentage
- Any member can bind the company to contracts
- A member's death or withdrawal may trigger dissolution
If you have two founders who contributed capital in a 70/30 split and expect profits to follow that same split, the default rules will produce a conflict the moment you pay yourselves.
What a good operating agreement covers
Ownership and capital contributions
Who owns what percentage, what each member contributed to earn that stake, and what happens if additional capital is needed later — dilution, loans, or right-of-first-refusal on new equity.
Profit and loss distribution
How and when profits are distributed — whether proportional to ownership, tied to a salary structure, or held in the company. Many disputes start when founders assume different things about this.
Management and decision-making
Which decisions require unanimous consent versus a simple majority? Who can sign contracts or open bank accounts on behalf of the LLC? A well-drafted agreement answers these questions before they become arguments.
Transfer restrictions
What happens if a member wants to sell their interest? Most operating agreements include a right of first refusal — existing members get the option to buy the departing member's stake before it can be sold to an outsider.
Banks, investors, and sophisticated commercial landlords will ask for your operating agreement as a matter of course. An LLC that can't produce one signals that the business is not well-organized — which affects your credibility regardless of how strong the underlying business is.
When to revisit yours
Even a well-drafted operating agreement needs to be reviewed when ownership changes, a new investor comes in, the business pivots significantly, or a member's role shifts. An agreement written for a two-person startup often doesn't contemplate what happens when the company has employees, outside investors, or multiple product lines.
The cost of a properly drafted operating agreement is modest relative to the cost of litigating what you intended to agree to.