What is an LLC Operating Agreement?

Why your LLC needs an operating agreement even if you are a single-member LLC.

When clients come to us after forming their LLC online, the most common gap I find is a missing or inadequate operating agreement. They have the Articles of Organization filed with the Washington Secretary of State. They have an EIN. Sometimes they even have a separate bank account. But they don't have an operating agreement — and that single document is often the most important piece of their business infrastructure.

What Is an Operating Agreement?

An LLC operating agreement is a legal document that governs the internal workings of your Limited Liability Company. It defines who owns the business and in what percentages, how decisions are made, what happens when a member wants to leave or transfer their interest, how profits and losses are distributed, and what happens if the company is dissolved.

Washington state does not require LLCs to have an operating agreement. But it strongly implies you should have one — and courts apply default statutory rules to LLCs that don't. Those default rules often aren't what owners would have chosen if they'd thought about it.

Single-Member LLCs Still Need One

I hear this objection regularly: "I'm the only owner. Why do I need an operating agreement?"

Several reasons. First, it reinforces the separation between you and your business — the foundational requirement for maintaining limited liability. When a creditor tries to pierce your LLC's veil (hold you personally liable for business debts), one of the factors courts look at is whether the LLC operated as a real, separate entity. A signed operating agreement is evidence it did.

Second, banks increasingly require operating agreements to open business accounts or approve loans. Having a well-drafted one saves friction later.

Third, it makes your intentions clear in ways that matter: what happens to the LLC when you die, how it's valued, who takes over, and what the succession process looks like.

Multi-Member LLCs: This Is Critical

If you have a business partner, your operating agreement is the most important document in your business relationship. It governs:

Ownership and capital contributions. Who owns what percentage, and what did each member contribute to earn that stake? Vesting schedules (where ownership builds over time to incentivize continued participation) should be documented here.

Decision-making authority. Which decisions can one manager make alone? Which require a majority vote? Which require unanimous consent? Without this, every significant decision is a potential dispute.

Profit and loss distributions. When does the company distribute profits, and how are they split? This is especially important when one member is active in the business and another is a passive investor.

Membership transfers and buyouts. What happens if one member wants to sell their interest? Do the other members have a right of first refusal? What happens if a member dies, divorces, or goes bankrupt? These buyout provisions are called "buy-sell" provisions and they are among the most negotiated parts of any operating agreement.

Exit and dissolution. Under what circumstances can the LLC be wound down? What happens to assets on dissolution?

What Happens Without a Good Operating Agreement?

I've seen multi-member LLCs without proper operating agreements fall apart over questions as simple as "can I hire my brother-in-law?" or "do we need both partners to approve a $15,000 expense?" Without documented answers, these become legal disputes — and legal disputes between business partners are expensive, slow, and relationship-destroying.

I've also seen single-member LLCs lose their liability protection because they couldn't produce documentation showing the LLC was treated as a separate entity.

Getting It Right

A well-drafted LLC operating agreement for a single-member LLC typically runs $750–$1,500. For multi-member LLCs, $1,500–$3,000 is reasonable depending on complexity. These are among the best legal investments a business owner can make.

If you formed your LLC without an operating agreement, or with a template you found online, contact Washington Law for a review. We can identify gaps and update your governance documents before they become problems. Reach David Kwan at (206) 555-1847.