What is an LLC operating agreement, and why do I need one?

If you’ve formed an LLC, or are thinking about it, you need to understand this question: What is an operating agreement, and why is it so important? An LLC operating agreement is the rule book for your business. It lays out how your company is owned and managed, and how profits and decisions are handled. Inside it answers questions like, who owns what? How do we decide what direction the business will take? And what happens if someone dies, divorces, or wants out?

So why do you need one? In my many years of experience, I have witnessed firsthand the benefits of a good operating agreement. It prevents fights over several important decisions that all parties involved have decided in advance, before a conflict has developed. It protects your limited liability status, which is why you created the LLC in the first place, and it lets you decide the rules for your business, not the state statutory rules. And banks or investors often require you to have one, even to open a new bank account.

Now, even if you’re a single-member LLC — just you alone and nobody else is managing the business — an operating agreement proves you’re not just a sole proprietor in disguise. It shows you mean business and helps shield your personal assets. Tennessee law specifically states that the liability shield applies to protect single members, although the protections are somewhat stronger when the LLC has two or more members. Whether you are in business alone or with a spouse, family, or others, the presence of an operating agreement is important as a foundational document.

If your LLC doesn’t have an operating agreement yet, now is the time. Whether it’s a side hustle, a real estate venture, or a family business, you should get it in writing and do it right, and we would be happy to help you make that happen.