This post is for information only. You are responsible for reviewing and using this information appropriately. This content doesn’t contain and isn’t meant to provide legal, tax, or business advice. Requirements are updated frequently and you should make sure to do your own research and reach out to professional legal, tax, and business advisers, as needed. To sell products using the Shopify platform, you must comply with the laws of the jurisdiction of your business and your customers, the Shopify Terms of Service, the Shopify Acceptable Use Policy, and any other applicable policies.

Among all the paperwork required to form a limited liability company (LLC), an operating agreement ranks as one of the most critical documents you’ll create. This legal document defines everything from ownership interests to management structure—and when disputes arise, it provides legal protection and a clear road map for resolution.

Here’s what an operating agreement does, how it differs from articles of organization, and what information goes into drafting your own.

What is a business operating agreement?

A business operating agreement is a document that outlines the internal operations, management structure, and ownership arrangements within an LLC, a business structure that offers legal separation between the owner and the business while avoiding the double taxation of a corporation—paying tax on corporate income as well as personal income. The agreement functions as a contract among all the owners, known as members.

An operating agreement establishes clear rules for how the company conducts its day-to-day operations and other business affairs, while also defining how profits will be distributed among members.

The entire agreement should be in writing, signed by all members. While verbal agreements might seem sufficient when everyone gets along, they offer far less legal protection when disputes arise. A written operating agreement protects both the business entity and individual members from misunderstandings or conflicting recollections.

Why you might need an operating agreement

Five states—California, Delaware, Maine, Missouri, and New York—require operating agreements for LLCs.

But even if you’re in one of the 45 states that don’t require them, creating one protects your business from internal disputes and unexpected liability. Without an operating agreement, your LLC is governed by your state’s default rules—the statutory provisions that apply when members haven’t set their own terms. Even single-member LLCs can benefit from an operating agreement because it reinforces the legal separation between the owner’s finances and the liabilities of the business.

The default rules also determine how profits are divided, how votes are counted, and how key decisions are made—but they may not align with your specific business needs or goals. For example, most state rules assume all members share profits and losses equally in the absence of any operating agreement, even if one member invested 90% of the capital and does most of the work. Additionally, many state statutes require unanimous approval for key LLC actions, like adding a new member, selling assets, or dissolving the company. This can paralyze decision-making if members disagree.

State LLC laws do offer limited liability—separating the owner(s)’s personal assets from the business’s—but a custom LLC operating agreement reinforces that separation. This clarity helps preserve the limited liability that distinguishes the LLC business structure from alternatives like a sole proprietorship or a partnership.

Although an LLC provides limited liability protection, courts can strip this away if they find you failed to operate separately from your personal finances—an action known as piercing the corporate veil. The operating agreement is a key tool in demonstrating to courts and other interested parties that your LLC is a distinct entity, not merely an extension of personal property. It documents that formal procedures have been established, separate finances are maintained, and the company is treated as separate from personal affairs. Courts examine these factors when deciding whether to hold members personally liable for debts or disputes despite LLC status.

Articles of organization vs. operating agreements

Articles of organization tell the state and the world that your LLC exists, while the operating agreement tells the members how to run it. Articles of organization are public documents filed with the state to officially create an LLC. They contain basic information, like your company’s name, its business purpose, contact information for a registered agent, and a principal mailing address. These documents are accessible to anyone who wants to review them. The articles of organization establish your company’s existence, and are required in all 50 US states.

The operating agreement, on the other hand, is an internal document that’s accessible only by the LLC’s members. It contains details about each member’s contributions, voting rights, profit distribution, and management responsibilities—information that usually doesn’t need to be made public. Many states allow forming an LLC with only minimal information in the articles of organization, which makes the operating agreement even more critical for establishing clear operational guidelines.

In states where an LLC operating agreement is required, there’s no need to physically file the agreement with the state, or disclose its contents. Simply draft one and keep it on hand when it’s needed, such as in the event of a dispute.

What is included in an operating agreement?

• Identifying information
• Statement of intent
• Terms
• Member agreements
• Withdrawal and dissolution procedure

Most operating agreements follow a similar structure that addresses ownership, management, finances, and procedures for various business scenarios. Key elements typically include:

Identifying information

The operating agreement begins with the company’s legal name, any other business names attached to it, the state where it is registered, the business purpose, and the names and addresses of all LLC members. For a multimember LLC, this section should identify each member’s percentage of ownership based on their respective capital contributions.

This section also specifies whether your LLC is member-managed, or managed by a third party appointed by the LLC. In a member-managed LLC, all members participate in daily operations and decision-making, while in a manager-managed LLC, daily affairs are run by an executive hired by the members. 

Statement of intent

The statement of intent, sometimes called the company purpose, articulates why the LLC exists and the business activities it will pursue. This can be broad (“to engage in any lawful business activity” is common language), or specific (“to operate an online store specializing in coffee, espresso machines, and hot beverage drinkware”). A clear statement of intent helps guide business decisions and ensures all the members share a common understanding of the LLC’s direction.

Terms

Terms and key provisions define how your LLC operates day to day. This covers rules about member voting rights, explaining whether decisions require unanimous consent, a super majority vote, or a simple majority. This section should specify which decisions require member votes, such as admitting new members, selling company assets, or dissolving the business.

The terms usually detail how and when the company’s profits and losses are allocated among members—typically based on each member’s percentage of ownership, though some agreements specify different arrangements.

This section should also address capital contributions, documenting each member’s initial contribution and whether additional contributions may be required. For multimember LLCs, it’s important to specify what happens if a member cannot or refuses to make required contributions. The terms section should also address how a membership interest is transferred, whether to other members or outside parties, and whether remaining members have the right to purchase a withdrawing member’s share on a first-priority basis.

Member agreements

The member agreements section protects each LLC member by establishing clear boundaries for operations and resolving potential conflicts before they arise. This includes each member’s obligations to the company, limits on involvement in competing businesses, and procedures to resolve disputes among members. For businesses with two or more members, this section should clearly define what happens when members disagree. Addressing these issues upfront can save significant time and expense later.

Member agreements often include provisions protecting the company’s intellectual property, confidential information, and financial records. They may restrict members from using company property for personal benefit, or require members to devote a certain amount of time to the business’s activities. For a manager-managed LLC, this section clarifies the manager’s duties and authority, distinguishing between decisions managers can make on their own and those requiring member approval.

Withdrawal and dissolution procedure

This section specifies how a member can voluntarily withdraw and what compensation they will receive, typically based on the fair market value of their membership stake. Buy-sell provisions are critical in multimember LLC agreements. They establish procedures and pricing mechanisms when a member wants to exit, becomes incapacitated, or dies. Such a provision might specify that the remaining members have the right to purchase the departing member’s ownership interest at fair-market value, determined by an independent appraisal.

Dissolution terms outline how an LLC is shut down, and how company property and assets will be distributed upon closure. These provisions should address both voluntary dissolution and events that trigger a forced dissolution, such as bankruptcy liquidation or the death or departure of a member.