An operating agreement is the internal agreement that sets out how an LLC will be owned, managed, and run.
Why It Matters
This document matters because it helps define member rights, management authority, profit allocation, voting, and exit arrangements. It is often a core document in disputes among LLC owners.
Where It Appears
Operating agreements appear in LLC formation, member disputes, business sales, financing review, and governance questions.
Practical Example
Members of an LLC sign an operating agreement stating who manages the company and how profits will be distributed. If disagreement later arises, that agreement may control the outcome.
How It Differs From Nearby Terms
An operating agreement is for an LLC. Bylaws are typically for a corporation. Articles of incorporation create a corporation, while an operating agreement mainly governs internal LLC relations after formation.
Related Terms
Knowledge Check
- What is an operating agreement used for? It is used to govern internal ownership and management of an LLC.
- How is it different from corporate bylaws? It serves a similar internal-governance role, but for an LLC rather than a corporation.