LLC - LP FAQs

What is an operating agreement?

An operating agreement is a formal document that sets forth the basic understanding by and among LLC owners as to how the Limited Liability Company will exist, be managed and be run. It's an internal compilation of issues agreed to by all the members of the Limited Liability Company. It is not required by law that your LLC have an operating agreement, but it is a sound business practice to have such an agreement in place to avoid confusion and problems.

An operating agreement usually sets forth the names of the members and their corresponding ownership percentages, what is expected of each member or manager as far as business conduct and performance, procedures for transferring ownership interests or assigning profits and losses, terms for adding or removing members, and conditions under which the Limited Liability Company may be dissolved. Any other point of concern as far as LLC operation or existence may be included in the agreement.

The risk you run by not having an operating agreement in place, in addition to internal confusion, is that your LLC's limited liability status could be placed in jeopardy. Without an operating agreement, your Limited Liability Company could also be forced to operate in accordance with your home state's default operating requirements rather than the way that you as owners would prefer that your company operate. In projects taken on by your LLC in which a good deal of capital or a substantial line of credit is at stake, some lending institutions may require your LLC to have an operating agreement.