LLC without operating agreement is a question many new entrepreneurs ask when forming their limited liability company. While most states in the U.S. do not strictly require an operating agreement, skipping this document can leave your business vulnerable to disputes, legal complications, and even financial risks. In this guide, we’ll explain what happens if you run your LLC without an operating agreement, whether you are a single-member or multi-member LLC, and why having one is considered a best practice.
What Is an Operating Agreement for an LLC?
An operating agreement is an internal legal document that outlines how your LLC is structured and managed. It typically covers ownership percentages, voting rights, profit distribution, and procedures for handling disputes or dissolving the company. Even though it’s not filed with the state, it serves as a binding contract among members and is highly valuable for proving how your LLC operates. You can learn more about the role of an LLC from the U.S. Small Business Administration.
Is an Operating Agreement Legally Required?
Not all states legally require an operating agreement, but a few do. For example, California, New York, Missouri, and Maine have specific rules that make it mandatory. In other states, if you don’t draft your own agreement, the LLC will automatically fall under the state’s default laws. These rules may not reflect how you want your business to run. According to the IRS guide on LLCs, LLCs are highly flexible, but that flexibility works best when members have a clear, written agreement.
What Happens If You Run an LLC Without an Operating Agreement?
If you operate without an operating agreement, your LLC will be governed by the default state laws. Here are some common risks:
- Loss of control: You may not be able to decide how profits are distributed.
- Disputes between members: Without clear rules, disagreements can escalate quickly.
- Weak liability protection: Courts may be more likely to “pierce the corporate veil” if your LLC lacks formal documents.
- Banking and investors: Many banks and investors will request a copy of your operating agreement before opening accounts or providing funding.
Benefits of Having an Operating Agreement
Even if it’s not required, an operating agreement strengthens your LLC by:
- Defining ownership and responsibilities clearly.
- Protecting your limited liability status.
- Making your company look more professional when dealing with banks or potential partners.
- Preventing future conflicts between members.
Single-Member LLC Without Operating Agreement
If you are the only owner of the LLC, you may think you don’t need an operating agreement. However, having one can:
- Demonstrate that your LLC is separate from your personal finances.
- Protect you in court if someone tries to argue your business is just a “sole proprietorship.”
- Help when applying for business credit or bank accounts.
Multi-Member LLC Without Operating Agreement
For LLCs with two or more members, the absence of an operating agreement is far riskier. Default state laws may split profits equally, even if one member invested significantly more. Without clear rules, you may face legal battles over decision-making, responsibilities, and exits. This is why attorneys and advisors strongly recommend drafting an agreement at the very start of the business.
Best Practices for Your LLC
- Draft an operating agreement as soon as you form your LLC.
- If you don’t know where to start, use a template and then customize it.
- Keep a signed copy in your company records and provide a copy to members.
- Update the agreement when new members join or business terms change.
Conclusion
Running an LLC without operating agreement is legally possible in most states, but it exposes your business to serious risks. Whether you are a single-member or multi-member LLC, having this document ensures clarity, protection, and professionalism. Think of it as an investment in your business’s future stability. To learn more about forming and managing LLCs, visit the U.S. Small Business Administration or check the official IRS guidance on LLCs.