Allison Harrison
June 20, 2024

What is an Operating Agreement and does my LLC need one?

An operating agreement is a legal document. It outlines the rules of the LLC's operations, member rights, and responsibilities. It also covers critical aspects such as where official records will be kept. The operating agreement also keeps the business running when there are disputes, a member leaves the company, or a member dies. Even single-member LLCs can benefit from an operating agreement for estate planning purposes.  

Resolving Disputes in Multi-Member LLCs

Operating agreements are important for multimember LLCs. They address disputes, what is a majority, and who has final say on a decision. In the absence of a clear operating agreement, disputes can arise over decision-making, profit distribution, and other key issues. The operating agreement serves as a roadmap for resolving these disputes, outlining the decision-making process, voting rights, and conflict resolution procedures. Having an operating agreement in place before a dispute helps avoid costly and time-consuming litigation, allowing the members to focus on the business.

Estate Planning Tool

An LLC is an asset owned by a member. As an asset, it is something that must be addressed when a member passes away, even if only to close down the LLC. The operating agreement can specify how ownership interests are to be transferred upon a member's death or incapacity, ensuring a smooth transition of the business and protecting the interests of the remaining members. Having successors identified in the operating agreement can allow for the business to continue to operate before an estate can be opened in Probate Court.

Important Terms

1. Decision Making: The Operating Agreement should identify how to make a decision and how many votes each member receives. Votes can be allocated per member or can be allocated based on ownership percentage. The Agreement should also identify if a simple majority is needed (50.1%) or if a larger number is needed (e.g. 75%). The number required can be different based on the type or dollar amount.

2. Procedure for Resolving Conflict: Even if the decision-making is clearly defined, there still may be disputes between and among members. A good operating agreement will provide mechanisms to resolve the dispute such as mediation.

3. Transfer of Ownership: The operating agreement should address how to transfer a membership interest upon death, incapacity, or a voluntary departure. It may include buy-sell provisions, a methodology to determine the value of the interest, and more!

4. Clear Right to Profits: One of the biggest areas to cause disputes is how to share in the profits of the company. A good operating agreement will address who, how, when, and how much distributions will be made to members.

Real-Life Examples

XYZ LLC, a real estate investment firm with four members, had a well-crafted operating agreement that addressed the transfer of ownership interests. When one member passed away, the agreement ensured that their ownership stake was transferred to the designated beneficiary, avoiding a drawn-out probate process and allowing the business to continue operations without disruption.

ABC LLC had 3 members where 1 member owns 51% and the other members collectively own 49% of the LLC. There is no operating agreement and it is not clear on how many votes each member receives (is it one each or one for each percentage owned). The three disagree and the member with 51% takes an action the other two do not agree on. The 49% owners now institute a lawsuit regarding the disagreement. An operating agreement could have addressed how many votes they each received (it also could have provided an alternative dispute resolution process in to save the parties money).  


Operating agreements are essential for the successful operation and long-term viability of LLCs. Clear rules in operating agreements can resolve disputes. They also provide for succession planning and ensure the business runs smoothly.