As an attorney guiding clients through forming a business, you’re likely well aware of the importance of selecting the right business structure. 

While several options are available to new business owners, the Limited Liability Company (LLC) is a popular choice for its flexibility and protection. However, forming an LLC goes beyond filling out paperwork and filing it with the state. Ultimately, the core of this process is the LLC operating agreement. It’s a document that defines how the company works and outlines processes surrounding ownership, decision-making, and responsibilities. 

While some states mandate operating agreements, others leave it to the discretion of the LLC’s members. Therefore, understanding these state-specific variations is critical for you as a lawyer to confirm that your clients’ LLCs are correctly structured, compliant, and positioned for success. 

What is an LLC Operating Agreement?

An LLC operating agreement is a legal document that establishes the rules and structure for the operation of a Limited Liability Company. It identifies the responsibilities of the members, how the company will be managed, and the approach and processes for decision-making and profit distribution. 

Even in states where LLC operating agreements are not required by law, having one is highly beneficial when a business tries to maintain clear expectations and avoid potential disputes among LLC members. 

Some of the things included in an operating agreement for an LLC are:

  • Ownership and Capital Contributions: Defines each member’s ownership percentages and initial capital contributions to the LLC.
  • Management Structure: Specifies whether the LLC will be member-managed or manager-managed. It also outlines the duties and authority of managers. 
  • Operational Procedures: Details the day-to-day operations of the LLC, including voting rights, profit sharing, and management of business affairs, such as appointing a registered agent.  
  • Profit and Loss Distribution: Discusses how profits and losses will be allocated among members, which might not always be the same. 
  • Dispute Resolution: Formulates a process to handle conflicts or disagreements between members, which can allow expensive lawsuits and legal issues to be avoided. 
  • Liability Protection: Reinforces the legal protections offered by the business structure, helping avoid personal liability for business debts. 

Ultimately, an LLC operating agreement can provide excellent clarity and structure, enabling smooth business operations and minimizing conflict down the line. It’s recommended to have one regardless of whether it’s required or not by the state. 

State-Specific LLC Operating Agreement Requirements

LLC operating agreements vary significantly on a state-by-state basis. While some states mandate that an LLC must have an operating agreement in place, others don’t require one, which leaves the decision to create one or not to the LLC members. 

States that Require an Operating Agreement

When considering what the best state to register an LLC is, it may be a wise move to consider the following:

  • For most people, forming an LLC in their home state is the best option since that’s where they conduct business. Even if they register in another state, they’ll likely need to file as a foreign LLC in their home state, even for home-based businesses.
  • California, New York, and Delaware: Three states that require an LLC operating within their borders to have a written operating agreement. This is true even if the LLC has only one member.
  • Specific Requirements:
    • California: The operating agreement must be in writing and can be oral or written, but the law encourages having one for clarity. 
    • New York: Requires LLCs to have an operating agreement, and while it doesn’t need to be on file with the state, it must be kept on record internally.
    • Delaware: While not required to be filed, the operating agreement is a key document for defining how the business is run as well as the roles and responsibilities of the LLC’s members. 

States that Do Not Require an Operating Agreement

Some states, such as Wyoming and Texas, don’t require an operating agreement whatsoever. However, this doesn’t mean that having this document is unnecessary.

  • Wyoming and Texas: These states don’t have formal requirements for operating agreements. 
  • Implications: Even though not legally required, it’s still highly beneficial for an LLC to have one established to aid in operating and sustaining the business. 
  • Best Practices: Drafting an operating agreement helps avoid relying on state default rules, which may not align precisely with the intentions of the LLC’s members.

States with No Specific Requirements but Best Practices

In states like Florida and Illinois, there are no legal requirements to file an operating agreement. However, it’s largely considered a best practice to create one. 

  • Florida and Illinois: No filing requirement for operating agreements, but having one enables the LLC to operate more productively and profitably. 
  • Best Practices: It is advisable for LLCs in these states to have a written agreement to prevent legal disputes and internal conflicts while also protecting the best interests of all of the LLC’s members. 

The Role of Lawyers in Drafting LLC Operating Agreements

Lawyers play a central role in drafting an operating agreement for an LLC client. They are one of the key players in ensuring that the document is legally sound, comprehensive, and tailored to the client’s specific needs. 

Without advice from an attorney, LLC members may overlook some of the most important provisions, which can lead to disputes, increased financial liabilities, and non-compliance with laws and regulations. 

Consider the following: 

  • Preventing Legal Pitfalls: Lawyers help identify and address risks, such as vague language or missing clauses, that could create problems among member teams. 
  • Ensuring Compliance: Each state has different LLC laws, and an attorney confirms the operating agreement meets all legal requirements. 
  • Customizing Agreements: A lawyer aligns the document with the unique needs of the business, including management structure, ownership terms, and operational procedures. 
  • Tax and Liability Considerations: Lawyers provide guidance on how the agreement impacts taxation, profit distribution, and personal liability protections. 
  • Protecting Clients’ Interests: An attorney helps safeguard members by drafting clear terms for decision-making, dispute resolution, and exit strategies. 

Common Mistakes to Avoid When Drafting LLC Operating Agreements

There are several common mistakes that can result in lawsuits and operational challenges for LLC members. 

  • Failing to Include Critical Provisions: Omitting key details like voting rights, profit distribution, and exit strategies can lead to disputes and uncertainty. 
  • Overcomplicating the Agreement: Including excessive legal jargon or unnecessary clauses make the document difficult to interpret and enforce. 
  • Ignoring State-Specific Requirements: Since state laws vary, it’s important to be aware of what your state requires to avoid legal issues and added liability. 
  • Neglecting to Update the Agreement: As the business grows, roles, responsibilities, and ownership structures may change, requiring revisions. 
  • Not Reviewing the Agreement Regularly: Business and legal landscapes evolve, so periodic reviews help keep the agreement relevant and enforceable. 

A Strong Operating Agreement is a Lawyers Best Tool

For attorneys advising LLC clients, a well-crafted operating agreement is more than just a document–it’s a safeguard against disputes, financial risks, and regulatory pitfalls.  By encouraging a client why an operating agreement is necessary and beneficial, legal professionals provide incredible value and can help establish a solid foundation for success.