An operating agreement is the governing contract adopted by members of a Limited Liability Company (LLC). It lays out the business's course and helps operations and management become more organized. It can be used to regulate nearly all aspects of the LLC's affairs, including how the business is managed, how assets are used, and how revenues are shared. It is similar to articles of incorporation, which control the operations of a corporation.
Although most states do not require the creation of an operating agreement, it is nonetheless regarded as a critical document that should be included when forming a limited liability company.
Once each member (owner) signs the document, it becomes a legally binding set of regulations that must be followed. An operating agreement will override any default rules presented by a state LLC statute. The absence of an operating agreement means that your business must be run according to the default rules of your state.
[Last updated in April of 2022 by the Wex Definitions Team]