What Is an LLC Operating Agreement and Why Do You Need One?

When you form an LLC in Washington, the state doesn't ask you to file an operating agreement. That leads many owners to skip it. That's a mistake, even if you're the only owner.

What is an operating agreement?

An operating agreement is the internal rulebook for your LLC. It spells out who owns the company, how it's managed, how money is handled and what happens when things change. If you don't have one, state default rules apply, and they may not match what you and your partners intended.

Why single-member LLCs need one too

• It supports your liability protection. A written agreement helps show that the LLC is a separate business, not just you under another name.
• Banks ask for it. Many banks require an operating agreement to open an LLC account.
• It plans for the unexpected. It can say who takes over if you become unable to run the business.

Why multi-member LLCs really need one

Without an agreement, disagreements between partners can become expensive and destructive. The agreement answers the hard questions before there's a conflict.

What to include

Ownership and contributions

• Each member's ownership percentage
• What each member contributed (cash, equipment, work)
• Whether members must contribute more money later

Management

• Member-managed or manager-managed
• Which decisions need a vote or unanimous consent
• Who can sign contracts and open bank accounts

Money

• How profits and losses are allocated
• When and how distributions are made
• How members get paid for work (guaranteed payments)

Tax matters

• How the LLC is taxed and who can make tax elections, such as an S-corp election
• Who serves as the partnership representative for IRS purposes (for multi-member LLCs)

Changes in ownership

• What happens if a member wants to leave, dies, becomes disabled or divorces
• How a departing member's share is valued
• Whether remaining members get the first right to buy

Dissolution

• How the business winds down and how assets are divided

Do I need a lawyer?

For a simple single-member LLC, a quality template can work. For a multi-member LLC, especially one with unequal contributions or complex profit splits, it's worth paying an attorney to draft or review the agreement. Your bookkeeper or tax professional can help make sure the money and tax sections match how your books are actually kept.

The bottom line

An operating agreement costs little to create and can save your business and your relationships. Write one when you form the LLC, sign it, store it with your formation documents, and update it when anything major changes.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.