What is an Operating Agreement?

Do you know what an operating agreement is for your business?

First off, an operating agreement only applies if you have an LLC. That's right, a limited liability company. If you do not have an LLC, you do not need an operating agreement. So, let's just make sure we get that out there in the beginning.

An operating agreement is typically private in your business. That means you're not going to file it with the Secretary of State, you're not sharing it with everybody and you're not showing your employees. It is really something between you and your business. Now, you, I'm assuming, are the owner of your business. If you have other owners in your business who have equity in your LLC, as we call them members, they will also be privy to the operating agreement. It's important that they get to see it too.

What does an operating agreement do? An operating agreement sets boundaries in your business. It talks about how you're gonna get paid, the formation of your limited liability company, the expectations of your limited liability company, and some things about equity. Taxes typically are found there as well. Now, an operating agreement is not something to be taken lightly. It could come into play in court if there's a dispute about your limited liability company. The bank typically asks for this when you set up your business bank account. It's really important that you have it. It is a legally binding contract. You will sign it! It is a binding between how you act with your company. If you breach your operating agreement, if you act differently than what it says on that piece of paper, you can open yourself up to personal liability and make your LLC pretty much moot and void.

Most people ask me what I do with it after I sign it if I don't show anybody and don't file it. You keep it! You put it where you put your corporate governance documents! You should have your Articles of Organization, your operating agreement, and your EIN number all saved in a physical folder and digitally.

Now, it may not ever come into play, but typically your business bank account will ask for it. If you apply for funding, they may want to see it. If you bring on new business owners, apply to be a woman-owned or minority-owned business, they typically like to see this as well. There are times when it can come up. Generally speaking, it's something that you just need to have for when the situation arises, it's requested, or needed. The operating agreement is not something that you're going to have to use proactively.

An operating agreement is super important in your business, without it you can void your LLC. It is not something that's generally on file anywhere else. It's something that you have to save and sign. Make sure you sign it and you act in accordance with your operating agreement!