Starting a business involves more than choosing a name, developing a product, or finding your first customers. Entrepreneurs also need to establish how their businesses will operate, who will make important decisions, and what happens when circumstances change.
For business owners forming a limited liability company (LLC), an operating agreement can help answer these questions before they become problems.
An LLC operating agreement is a legal document that establishes the rules governing a company's internal operations, including ownership, management responsibilities, voting rights, and financial arrangements. While entrepreneurs can draft their own operating agreements, creating one that accurately reflects the needs of their business requires careful consideration.
Whether you are launching a startup with several co-founders or establishing a single-member LLC, understanding what goes into an operating agreement can help you make informed decisions about your company's future.
What Is an LLC Operating Agreement?
An LLC operating agreement is an internal governing document that establishes how a limited liability company will be managed and operated. It outlines the rights and responsibilities of the LLC's members, including their ownership interests, financial obligations, and authority to make business decisions.
Unlike Articles of Organization, which are filed with the state to establish an LLC, an operating agreement generally remains an internal company document.
For example, suppose two entrepreneurs decide to launch an e-commerce business together. One founder contributes most of the initial capital, while the other manages product development, marketing, and daily operations.
Although both individuals may consider themselves equal partners, they still need to determine how ownership will be divided, whether their voting rights will be equal, and how profits will be distributed.
An operating agreement can document these arrangements and establish procedures for addressing future changes.
Our article on How to Form an LLC in New York in 2026 explains the broader formation process, including registering the business and meeting New York's legal requirements.
Do Startups Need an Operating Agreement?
Whether a startup legally needs an operating agreement depends on the state where its LLC is formed. Some states require LLCs to adopt operating agreements, while others allow LLCs to operate without a written agreement.
However, even where a written operating agreement is not mandatory, having one can help business owners establish clear expectations about how their company will operate.
For startups with multiple founders, an operating agreement can be particularly important because it addresses matters that may otherwise be left to informal conversations or assumptions.
These matters may include how business decisions are approved, whether members can transfer their ownership interests, how additional capital will be raised, and what happens if a founder decides to leave the company.
Does a New York LLC Need an Operating Agreement?
Yes. Under New York Limited Liability Company Law § 417, members of a New York LLC are required to adopt a written operating agreement.
The agreement may be entered into before the LLC is formed, at the time of formation, or within 90 days after the Articles of Organization are filed.
Unlike the Articles of Organization, the operating agreement does not need to be filed with the New York Department of State.
New York's requirement applies to LLCs generally, including single-member LLCs.
Business owners should understand that filing their formation documents does not eliminate the need to address how the company will be governed.
Can You Draft Your Own LLC Operating Agreement?
Yes. LLC owners can generally prepare their own operating agreements without hiring an attorney.
Numerous online services provide operating agreement templates, and entrepreneurs may find these resources appealing because they are accessible and relatively inexpensive.
However, the ability to draft an operating agreement yourself does not necessarily mean that a generic template will adequately address your business's needs.
An operating agreement should reflect the actual relationships, responsibilities, and expectations of the people involved in the company.
For example, a startup with three founders may need provisions addressing unequal financial contributions, different management responsibilities, restrictions on transferring ownership, and procedures for resolving disagreements.
A basic template may not account for all these circumstances, particularly when the business has unusual ownership arrangements or plans to bring in additional investors.
An attorney can help founders evaluate these considerations and draft provisions that reflect their intended business arrangements while complying with applicable state law.
As discussed in our article, Do You Need a Lawyer to Start a Business in New York?, entrepreneurs can handle many formation tasks independently, but professional legal guidance may become more valuable when a business involves multiple owners or complex legal arrangements.
What Should Be Included in an LLC Operating Agreement?
Although operating agreements vary depending on the business, several provisions are commonly addressed when drafting one.
Ownership Interests and Member Contributions
An operating agreement should identify the LLC's members and establish their respective ownership interests.
It may also describe what each member contributes to the company, whether through money, property, services, or other agreed-upon resources.
These provisions are particularly important when founders contribute different amounts of capital or perform different responsibilities.
Management and Voting Rights
An LLC may be managed by its members or by designated managers, depending on its structure and governing documents.
The operating agreement can establish who has authority to make decisions and which actions require approval from other members.
For example, founders may agree that routine operational decisions can be made by one manager, while taking on substantial debt, admitting a new member, or selling the business requires additional approval.
Profit Distributions and Financial Obligations
An operating agreement can establish how profits and losses are allocated and how distributions are made to members.
These arrangements do not always have to mirror ownership percentages, although they must comply with applicable legal and tax requirements.
The agreement may also address whether members are expected to make additional capital contributions and how the company will respond if more funding is required.
Because financial arrangements can create significant tax consequences, business owners should coordinate with appropriate legal and tax professionals. Our comparison of LLC vs. S-Corp in New York explains how entity tax elections can affect owners.
Adding or Removing Members
Startups frequently change as they grow. A founder may decide to leave, a new partner may join, or the company may seek additional investment.
An operating agreement can establish procedures for admitting new members, transferring membership interests, and handling a member's departure.
It may also address how an ownership interest will be valued and whether existing members have the right to purchase that interest before it is transferred to someone else.
Dispute Resolution and Dissolution
Even business partners with strong working relationships can disagree about the company's direction.
An operating agreement can establish procedures for resolving disputes, addressing voting deadlocks, and determining when the business should be dissolved.
These provisions can become especially important when disagreements interfere with daily operations.
Our guide on Suing a Business Partner in New York: A Small Business Owner's Guide explores the legal issues that may arise when disputes between business owners escalate.
Are LLC Operating Agreements Legally Binding?
An LLC operating agreement can be legally binding and enforceable, provided it satisfies applicable legal requirements.
Once properly adopted, the agreement generally governs the rights and obligations of the LLC and its members to the extent permitted by state law.
However, not every provision included in an operating agreement will necessarily be enforceable.
For example, an agreement cannot override mandatory legal requirements simply because the members consented to a particular provision.
Ambiguous language, conflicting terms, improper execution, or provisions that violate applicable law can also create enforceability concerns.
This is one reason careful drafting matters. An operating agreement should clearly communicate the parties' intentions while accounting for the legal rules governing the LLC.
What Happens If an LLC Does Not Have an Operating Agreement?
When an LLC does not have an operating agreement, the consequences depend on the laws of the state where it was formed.
In many states, statutory default rules govern matters that the members have not addressed through an operating agreement.
Those default rules may not reflect how the owners actually intended to operate their business.
For example, founders might assume that one member has authority to make all financial decisions because that individual contributed most of the startup capital. However, the applicable legal rules may establish a different management or voting arrangement.
Without a properly drafted agreement, disagreements about ownership, authority, distributions, or membership transfers can become more difficult to resolve.
For New York LLCs, failing to adopt a written operating agreement also means failing to satisfy the requirement established under § 417. That failure does not automatically mean the LLC ceases to exist or that its members lose limited liability protection.
Nevertheless, operating without a written agreement can leave important governance questions unresolved and expose the business to avoidable disputes.
Does an Operating Agreement Protect LLC Owners From Personal Liability?
One reason entrepreneurs form LLCs is to create legal separation between the business and its owners.
Generally, LLC members are not personally responsible for the company's debts and obligations solely because they are members.
However, this protection is not absolute.
An LLC owner may still face personal liability under certain circumstances, including when they personally guarantee a business obligation, engage in their own wrongful conduct, or when a court determines that grounds exist to disregard the entity's separate legal status.
An operating agreement can help document the company's governance structure and the separation between the LLC and its members, but the agreement itself does not create an absolute shield against personal liability.
Business owners should also maintain appropriate company records, separate personal and business finances, and comply with applicable legal requirements.
What Are Common Mistakes When Drafting an LLC Operating Agreement?
One common mistake entrepreneurs make is assuming that an operating agreement only needs to identify the company's owners and their ownership percentages.
While ownership is important, it represents only one aspect of the company's internal governance.
Other mistakes include relying on a generic template without reviewing its provisions, failing to establish clear voting procedures, overlooking what happens when a member leaves, and failing to address how disputes will be resolved.
Founders may also neglect to update their agreements as the business changes.
For example, an operating agreement drafted when a company had two members may no longer reflect its needs after admitting additional members or changing its management structure.
An agreement should be reviewed when significant developments affect the company's ownership, operations, or financial arrangements.
When Should You Hire an Attorney to Draft an Operating Agreement?
Not every LLC has the same legal needs.
A single-member LLC with straightforward operations may require a relatively simple operating agreement, while a startup with several founders, investors, or complex financial arrangements may need a more detailed document.
An attorney can help identify potential areas of disagreement, explain applicable legal requirements, and draft provisions that reflect how the business intends to operate.
Professional assistance may be particularly valuable when founders have unequal ownership interests, anticipate raising capital, plan to transfer membership interests, or need customized management and voting arrangements.
Legal guidance may also be useful when reviewing an existing operating agreement to determine whether it still reflects the company's operations.
Our Contracts practice assists entrepreneurs and businesses with drafting, reviewing, and negotiating agreements, including LLC operating agreements and other documents governing business relationships.
Build Your Startup on a Strong Legal Foundation
Starting a business is an exciting undertaking, but the decisions made during its early stages can influence how it operates for years to come.
An LLC operating agreement provides an opportunity to establish clear expectations, define responsibilities, and prepare for changes before disagreements arise.
Although entrepreneurs can draft their own operating agreements, the right approach depends on the company's ownership structure, operational needs, and long-term objectives.
At Stockman & Poropat, PLLC, we understand the challenges entrepreneurs face when building and growing their businesses. Our team assists business owners with entity formation, operating agreements, contract drafting, intellectual property protection, and other legal matters that arise throughout the life of a company.
Whether you are forming your first LLC, starting a business with partners, or reviewing an existing agreement, our attorneys can help you evaluate your legal needs and establish an appropriate framework for your business.
Contact Stockman & Poropat, PLLC to schedule a free consultation and learn how we can assist with drafting or reviewing your LLC operating agreement.
This article is provided for general informational purposes only and does not constitute legal or tax advice. Legal requirements and outcomes depend on the applicable jurisdiction and individual circumstances.
Have a question about your matter?
Schedule a free consultation with Stockman & Poropat, PLLC.
Contact the firm
