The US LLC Operating Agreement: the contract everyone reads

The Operating Agreement is your LLC's founding contract between its members. No state wants it on file, yet it decides almost everything that happens in your company: who runs it, who votes, who gets paid and when, and what happens when someone wants out. Where the agreement is silent, state law fills in its own rules, and they are not always the ones you expect. Here is what belongs in it, what applies without one, and why members from Europe should read it closely.

1The company agreement nobody files

With the American LLC, the agreement between the owners never goes on a public register. All you file with the state is a short formation document: the Certificate of Formation in Delaware and Texas, the Articles of Organization in Florida and Wyoming. What the members agree among themselves goes into a separate contract, the Operating Agreement, and it stays with the company.

The Texas Secretary of State puts it plainly: a company keeps its internal governing documents at its principal office, no statute authorizes filing them, so the office will not accept them. Even New York, the only one of the major formation states that requires a written agreement, does not put it on file.

The statutes themselves show how informal the agreement may be. Delaware defines the Limited Liability Company Agreement as any agreement of the members on the affairs of the company, written, oral or implied, whatever it is called. Texas calls it the Company Agreement and defines it the same way; Florida and Wyoming accept it oral, implied or in a record. An agreement can be made before, at or after the filing of the formation document. And it binds: in both Delaware and Texas, members and managers are bound by it even if they never signed it.

Informal does not mean unimportant. If you have no written Operating Agreement, you still have a contract, only it was written by the state legislature. That is why every LLC package you can order on the US LLC formation page includes the Operating Agreement from day one.

2What applies when the agreement is silent

Every LLC statute contains default rules for when the members have agreed nothing. Delaware and Texas, two of the most popular formation states, show how differently those rules turn out. The table sets them side by side.

Two differences jump out. In Delaware, without an agreement, the members manage according to their share of profits; whoever holds more than half decides. In Texas, by contrast, each person has an equal vote at a meeting, no matter how much they put in. So if you hold 90 percent and your partner 10 percent in a Texas LLC without a written agreement, you vote as equals. For acts outside the ordinary course of business, Texas requires a majority of all governing persons, for fundamental business transactions a majority of all members, and for an amendment to the Certificate of Formation the consent of everyone.

The second difference concerns exit. In Texas, without a contractual provision, a member can neither withdraw nor be expelled. A member can transfer their interest, but the buyer then receives only profit shares and distributions, with no say in the company. Without an exit clause there is no orderly way out, and in Texas new members only come in with everyone's consent.

Both states share one rule: profits and distributions are allocated by the agreed value of contributions as recorded in the company's records. If those records are missing, so is the basis for the allocation. This is where it becomes clear why the member list, contributions and resolutions must be kept from the start.

3The chapters of a good Operating Agreement

An Operating Agreement is not a form; it is the rulebook for how you work together. The statutes leave plenty of room. Texas allows any provision on the governance of the company that does not violate the law and lets you modify almost all statutory provisions; only a short list of rules is mandatory. Delaware goes further still: fiduciary duties of members and managers can be expanded, restricted or even eliminated in the agreement. Only the implied covenant of good faith and fair dealing always remains. That freedom only helps if you use it. A complete agreement answers at least these questions.

3.1Members, interests and contributions

Who is a member, with what interest, and what has each one contributed? An LLC has no minimum share capital. That makes it all the more important that the agreed value of every contribution is set down in writing, because, absent other rules, it drives the allocation of profits and distributions. This also covers whether, and on what terms, members must contribute more later.

3.2Management and authority

Is the LLC run by its members (member-managed) or by managers (manager-managed), who need not be members? In Texas the Certificate of Formation must answer this at formation and list the initial managers or, if there are none, the initial members by name and address. The Operating Agreement covers the rest: who may sign alone, which transactions need a resolution, whether there are officers such as a President or Treasurer, and who controls the bank account.

3.3Resolutions and majorities

Vote per head or per interest? Which majority for which decision? How are meetings called, and can resolutions be passed in writing or by video? Leave this open and you get one vote per person in Texas and a majority by profit share in Delaware.

3.4Profit, loss and distributions

How are profit and loss allocated, when are distributions made, and are there tax distributions so every member can pay the tax on their share of profit? For an LLC taxed as a partnership this is no side issue: members pay tax on their share even if nothing is distributed.

3.5Transfers, right of first refusal and exit

May a member sell their interest, and do the others have a right of first refusal? What happens on a member's death, divorce or insolvency, and how is a departing member bought out? In Texas this clause matters especially, because without it the law provides no way to withdraw.

3.6Dissolution, disputes and governing law

When is the company dissolved, who winds it up, and how is a dispute decided, before which court or arbitral tribunal and under which law? Plan for this now and you save yourself months when it counts.

How resolutions and minutes are then kept day to day is explained in Corporate requirements and compliance for the US LLC.

4Tax clauses: what the IRS reads in the agreement

For federal tax purposes, the LLC is an eligible entity that can choose how it is classified. Without an election, a US LLC with at least two members is treated as a partnership, and a single-member LLC is transparent, an entity disregarded from its owner (disregarded entity). If you want a different classification, such as a corporation, you elect it on Form 8832. The Operating Agreement does not change this classification, but it has to fit it.

For a multi-member LLC, this means three things above all. First, the rules for capital accounts and the allocation of taxable income, which must match the profit split in the agreement. Second, the Partnership Representative: every partnership must designate a partner or another person with a substantial presence in the US who alone has authority to represent the company before the IRS in an audit. If the company designates no one, the IRS may choose a person itself, and the decisions in that proceeding bind all partners. So who serves as Representative and how they report to the members belongs in the agreement. Third, the annual return on Form 1065, which a calendar-year partnership files by March 15; more on this in Form 1065.

If the LLC is owned by a single person abroad, it stays transparent for income tax, but it is treated as a corporation for the reporting rules under Section 6038A. It files a Form 5472 with a pro forma Form 1120 and must be able to document its transactions with its owner. An agreement that cleanly separates the member's contributions, withdrawals and loans is the best foundation for this. The details are in Form 5472.

6The single-member LLC: a contract with yourself

Many founders think a contract with only one party is pointless. The law disagrees. Delaware expressly provides that a single-member LLC's agreement is not unenforceable just because only one person is a party to it; Texas says the same about the Company Agreement.

Your contract with yourself does three jobs. It documents that the LLC is a separate person with its own assets and not your wallet, which matters for liability protection; more on this in Protecting your US LLC's liability shield. It sets out who acts when you can't, for example through a manager or a power of attorney. And it determines what happens to the LLC when you die and how a co-member is admitted later. That last question becomes important the moment a partner or investor wants to come on board.

7New York: in writing and within 90 days

New York is the exception among the major formation states. The Department of State requires an LLC's members to adopt a written Operating Agreement before, at or within 90 days after filing the Articles of Organization. Even there, the agreement is not filed. If you form in New York, you also have to meet the publication requirement: within 120 days, the formation must be published in newspapers and the Certificate of Publication filed, or the LLC's authority to do business is suspended.

Everything else New York requires is covered in Forming a New York LLC. In Delaware, Florida and Wyoming, oral and implied agreements are just as valid as written ones; we still work in writing there, for the reasons set out in the previous sections.

8Signing, keeping, amending

An Operating Agreement is signed at formation and can take effect retroactively from the filing date. Delaware expressly allows the agreement to be entered into before, at or after filing the Certificate of Formation and to take effect from the moment of filing. It is kept at the company, together with the member list, resolutions and minutes.

The agreement is amended under the rules it sets for itself. In Texas, the law requires every member's consent for any amendment to the Company Agreement. Every amendment should be adopted in writing and recorded in the company's records, especially when ownership, contributions or management change. Admitting new members means amending the Operating Agreement and the member list at the same time and, in a partnership, the basis of the Form 1065 return.

Anyone who does business with your LLC, lends to it or wants to buy it will ask for these records. They are the company's memory. Keeping them from day one is part of every formation on Forming a US LLC.

9How to spot a good Operating Agreement

Finally, a checklist for the agreement you are about to sign. It names every member with their share and agreed contribution value. It says whether members or managers run the company, matching the state formation document. It sets out voting rights and majorities explicitly instead of relying on the state's default rule. It allocates profits and distributions the way you actually want and provides for tax distributions if the LLC is taxed as a partnership.

It contains a clause on transfers, right of first refusal, death and withdrawal. With several members, it names the Partnership Representative. It is aligned with the tax plan for your country of residence, so your home country classifies the LLC the way you planned. And it says how it can itself be amended.

If your draft ticks these boxes, it is a contract. If it doesn't, it is a template. We go through the questions to settle before forming in the consultation on company formation.

In short

• The Operating Agreement is the LLC's governing contract. Delaware, Texas, Florida and Wyoming also accept it orally or by implication; New York requires a written agreement within 90 days of formation.
• It is not filed anywhere. It stays with the company and binds the members even without a signature.
• Where the agreement is silent, state rules apply; in Texas, for example, each person has an equal vote and no one can withdraw.
• Without an election, the IRS treats a single-member LLC as transparent and a multi-member LLC as a partnership; a partnership needs a Partnership Representative with a substantial presence in the US.

How we help you

• Form an LLCThe US LLC with a permanent establishment, turnkey in six states.
• Company formation consultationEntity type, state and tax consequences, before you commit.
• Tax structureA clean structure between parent company and US subsidiary, or between you and your US company, coordinated with your accountant.
• LLC and LP Tax ReturnForm 1065 and K-1 for your LLC or LP.