Operating Agreements: The Basics

Overview

An operating agreement is the internal governing document of a limited liability company. Utah law does not require it to be filed with the Division of Corporations and Commercial Code, but written operating agreements are standard practice because they define who owns what, who decides what, and what happens when circumstances change.

Key terms

• Member: an owner of the LLC.
• Member-managed: the members run the company directly (the default under Utah's LLC act unless the agreement says otherwise).
• Manager-managed: the members appoint one or more managers to run day-to-day operations.
• Capital contribution: money or property a member puts into the company.
• Buy-sell provisions: rules governing how a member's interest is sold or transferred.

What an operating agreement typically covers

Ownership and contributions. Each member's ownership percentage and what each contributed (cash, property, or services). Percentages and contributions are not always proportional, and the agreement records the actual deal.

Distributions. How and when profits are paid out, and whether distributions require a vote or follow a set schedule.

Management and voting. Whether the LLC is member-managed or manager-managed, who has authority to sign contracts or borrow money, and which decisions require unanimous versus majority approval.

Transfer restrictions. Whether members may sell or transfer their interests, rights of first refusal for the company or other members, and how a departing member's interest is valued.

New members and departures. How new members are admitted, and what happens on death, disability, divorce, or voluntary withdrawal of a member.

Dissolution. The events that trigger winding up the company and how assets are distributed afterward.

Dispute resolution. Many agreements specify negotiation, mediation, or arbitration procedures before litigation.

Why single-member LLCs still use them

A single owner might assume no agreement is needed. In practice, banks frequently ask for one when opening business accounts, it documents the separation between owner and company (relevant to liability protection), and it addresses succession: what happens to the business if the owner dies or becomes incapacitated.

Relationship to the certificate of organization

The certificate of organization is the public filing that creates the LLC. The operating agreement is the private document that governs it. The two should be consistent; where they conflict, the filed certificate generally controls as to third parties, which is one reason the agreement deserves careful drafting.

Common mistakes

• Downloading a generic template, never reading it, and never signing it.
• Leaving the agreement unchanged after adding members or changing ownership percentages.
• Contradicting the certificate of organization on management structure.
• Omitting transfer restrictions, then facing an unwanted co-owner after a member's divorce or death.
• Relying on a purely oral agreement, which is difficult to prove.