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An Operating Agreement is a legal document that formalizes the financial and management rights and responsibilities of each partner in a Limited Liability Company (LLC). An Operating Agreement defines each partner’s percentage of ownership, profits, and losses; it also sets forth what will happen to the company should one partner leave or the company be dissolved.

Some states legally require an LLC to have an Operating Agreement, but it’s a good idea to have one regardless. Without an Operating Agreement, the company is run by your state’s default rules, which may differ from you and your business partners’ rules (or lack thereof). Additionally, lenders may consider the lack of an Operating Agreement to be a red flag, which can limit your company’s funding options.

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