• By: Josh Palmer
  • August 24, 2022
Reading Time: 4 minutes
How to Write an Operating Agreement

An operating agreement outlines a business’ structure, including ownership, capital contributions, and member responsibilities. Check out this step-by-step guide for what your agreement should include.

While not required in most states, businesses and organizations should draft operating statements to ensure business is conducted properly and investments are protected. A written operating agreement guides the decisions of the board of directors and leadership. Additionally, it helps if the state challenges the legitimacy of your LLC.

This comprehensive guide breaks down what an operating agreement is, why it is essential, and how to write one. Read on to find out more and learn how our board governance solution can help you streamline this process.

What is an Operating Agreement?

Similar to articles of incorporation, an operating agreement is a document that customizes the terms of a limited liability company (LLC) to meet the particular requirements of its members. It also describes how financial and functional decisions are made in a structured approach. One of the corporate board secretary’s duties is to draft the operating agreement and ensure compliance once an agreement has been reached.

Even though it is not required by law in most states, an operating agreement is a critical document to create when forming an LLC. Once each member (owner) has signed the agreement, it becomes a legally enforceable set of rules that must be followed. It can also set the board term limits for your LLC. Owners can then manage internal operations per their own policies and guidelines. 

An operating agreement creates a legal buffer between the LLC and the owners or directors, preventing them from being held liable for the LLC’s obligations. Otherwise, their personal assets may be pursued by the LLC’s creditors. An operating agreement also enables the owner to formalize governance processes like meetings and voting, as well as the terms of succession for their company.

RELATED: The Complete Guide to Writing a Contractor Agreement

Step-by-Step Guide for Writing an Operating Agreement

Follow these steps to write an operating agreement.

Outline Ownership

LLC owners typically provide the business with initial capital in the form of money, assets, or services. Each LLC member receives a portion of the LLC’s assets in exchange. However, LLC members are free to distribute ownership in any way they see fit. Members typically receive ownership percentages directly proportional to the capital they have contributed. Your operating agreement should include these contributions and percentage interests in detail.

In addition to ownership interests in consideration for their financial contributions, LLC owners also receive “distributive shares,” which are shares of the LLC’s profits and losses. Most often, operating agreements outline each owner’s distributive share.

All parties in the LLC should review the ownership section together to confirm assets, losses, and profits have been fairly allocated to each member.

Define Ownership Rights, Responsibilities, and Compensation

One of the most crucial elements of an operating agreement is protection. The rights and obligations of each LLC member should be covered in the following section of your operating agreement. These could include voting rights, performance requirements, compensation, daily duties of every member, and meeting requirements for members.

Because members typically vote on significant decisions during meetings, voting rights and meeting provisions are closely intertwined. The voting provisions should specify each member’s voting share in detail; this share is typically, but not always, equivalent to the member’s ownership stake. You must also state whether a simple majority is required to finalize a vote.

Most business owners desire the flexibility to alter their LLC operating agreement as needed. If you want this chance, you should define how operating agreement amendments will be voted on. 

Define Dissolution Terms

Finally, the operating agreement must cover the potential that members may desire to dissolve the company at some point. In most cases, members must vote to begin the dissolution process.

Dissolving an LLC can be a complicated process involving submitting the necessary paperwork to the state, liquidating assets, paying off debts, and more. After all debts have been settled, members divide any remaining assets. As such, the wind-down procedures should be included in the operating agreement.

RELATED: The Complete Guide to Writing a Partnership Agreement

Leverage Board Management Software to Drive Effective Corporate Governance

As technology plays an increasingly important role in overall business processes, many businesses are exploring how they can use it to improve their corporate governance framework. Board management software aids in corporate governance, making boards more effective and board members more accountable. 

OnBoard, a purpose-built board portal platform, comes equipped with enterprise-grade document storage to house your operating agreement and other crucial business documents. Its easy-to-use platform includes chat and videoconferencing capabilities so board members can move more quickly, operate more effectively, and accomplish more — from anywhere.

Ready to empower your board of directors with the tools they need to achieve more? Request a free trial of OnBoard to get started.

About The Author

Josh Palmer
Josh Palmer
Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.