Operating Agreement Basics Every Founder Should Know
Your operating agreement is the foundation of your LLC. Learn what clauses to include, common pitfalls, and how to structure it for future growth and investment.
Key Takeaways
- What is an operating agreement
- Why you need an operating agreement
- Essential provisions to include
- Single-member vs multi-member provisions
- Preparing for investors
What is an operating agreement
An operating agreement is an internal document that defines how your LLC is structured, managed, and operated. While not all states require it, every LLC should have one—especially for banking applications and liability protection.
Why you need an operating agreement
- Required by most banks for business account applications
- Establishes your LLC as a separate entity (protects liability shield)
- Defines ownership, voting rights, and profit distribution
- Provides framework for dispute resolution
- Documents management structure and decision-making processes
- Required for business bank and payment processor applications (Mercury, Stripe, PayPal)
Essential provisions to include
- LLC name, address, and formation state
- Member names, addresses, and ownership percentages
- Capital contributions (initial and future)
- Profit and loss distribution methodology
- Management structure (member-managed or manager-managed)
- Voting rights and procedures
- Meeting requirements (if any)
- Amendment procedures
- Dissolution provisions
- Authorized signer clause defining who may open bank and payment accounts
Single-member vs multi-member provisions
Single-member operating agreements are simpler but should still address key points. Multi-member agreements need comprehensive provisions for decision-making, profit distribution, and member exit procedures.
| Provision | Single-Member | Multi-Member |
|---|---|---|
| Ownership | 100% to sole member | Percentage breakdown required |
| Decision making | Sole member decides | Voting procedures needed |
| Profit distribution | All to owner | Distribution formula required |
| Exit procedures | Dissolution terms | Buy-sell provisions essential |
Preparing for investors
If you plan to raise funding, your operating agreement should be investment-ready. Include provisions for adding new members, issuing different classes of membership interests, and handling investment rounds.
Common mistakes to avoid
- Using free templates without understanding or customizing them
- Not signing the operating agreement (banks will check)
- Inconsistencies between operating agreement and formation documents
- Missing amendment procedures (makes changes difficult)
- Not addressing what happens if the sole member becomes incapacitated
- Using generic templates that do not define operational control (a common fintech rejection trigger)
US banks and Stripe typically request this document during compliance review. Ensure it's complete, signed, and consistent with your other formation documents.
Frequently asked questions
Does my operating agreement need to be filed with the state?
No. Operating agreements are internal documents and are not filed with any government agency. Keep your original signed copy safe and provide copies as needed for banking and business purposes.
Can I update my operating agreement later?
Yes. Operating agreements can be amended following the procedures outlined in the document itself. For single-member LLCs, the sole member can typically amend at will.
Need an operating agreement?
Our formation packages include customized operating agreements for your LLC structure.
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Related guides
Continue learning with recommended next steps in Formation.