What an operating agreement does
An operating agreement is the rulebook for an LLC. It sets out who owns what, who makes which decisions, how money is distributed, and what happens when someone leaves. Without one, your state's default LLC rules fill the gaps — and they may not match what you and your co-founders agreed.
This post is about LLCs. A corporation covers the same ground with bylaws and, often, a stockholders agreement. For the other documents a new company needs, see 5 legal documents every new company needs on day one.
What happens without one
State defaults may not fit your deal
Every state has default rules that apply when an LLC has no operating agreement, and they vary. Depending on the state, the defaults may:
- split profits equally regardless of who put in more money or time, or split them by contributions,
- give every member an equal say in management,
- require every member's consent for major decisions,
- set their own rules for whether a member can bind the company.
Defaults are written for a generic company, not for yours. If you have a lead founder, a passive investor or unequal stakes, check what your state's LLC act says with counsel before relying on it.
Where a missing agreement causes damage
- A co-founder leaves. Without buyout terms, the departing member may keep their full interest, even if they stopped contributing early.
- A member wants out. Without transfer restrictions, a member may be able to pass their economic interest to someone the others didn't choose.
- The members disagree. Without a defined voting structure, you fall back on the statute, which may require everyone's consent for major decisions — so one disagreement can stall the company.
- Distributions are disputed. Without a distribution policy, members can disagree about when and how profits are paid out.
What a good operating agreement covers
Ownership and capital contributions
- Who owns what percentage
- What each member contributed — cash, IP or services
- How future capital calls work, and what happens if a member doesn't contribute
Management
- Member-managed or manager-managed
- Voting thresholds for different kinds of decisions
- Day-to-day authority versus decisions that need a vote
- Officer roles
Profits, losses and distributions
- How profits and losses are allocated — by ownership percentage or another agreed method
- When distributions happen
- Tax distributions, so members can cover tax on their share of profits
- What happens to retained earnings
Transfers
- Right of first refusal if a member wants to sell
- Drag-along and tag-along rights
- Who a member may not transfer to
- How an interest is valued for a buyout
Exits
- What triggers a buyout — departure, death, disability or breach
- How the company is valued for a buyout, and whether it's paid at once or in installments
- Non-compete and non-solicitation terms, where your state enforces them
Dissolution
- What triggers dissolution
- How assets are distributed
- How the company winds down
The template trap
A generic template is better than nothing, but not by much. Templates tend to:
- use boilerplate that doesn't match your actual arrangement,
- miss state-specific requirements,
- leave out vesting, IP assignment and revenue-share terms,
- create ambiguity that becomes expensive in a dispute.
A better starting point is a draft built from your real company data — your actual ownership, management structure and distribution rules — so the document starts close to what you agreed. Have counsel review it, especially if the deal is complex.
What each option costs
| Approach | Cost | What you get |
|---|---|---|
| No agreement | Free | Your state's default rules |
| Free online template | Free | A generic document you have to adapt yourself |
| Paid template service | A one-time fee | A more complete template, still generic |
| A startup lawyer | The highest cost | An agreement drafted and advised on for your situation |
| HYVV | Included with Hyper Formation Core (see pricing) | A draft built from your company record, signed inside HYVV; lawyer review recommended for complex deals |
When to revisit it
An operating agreement isn't set-and-forget. Revisit it when:
- a member joins or leaves,
- ownership changes, through a new investment or vesting,
- the management structure changes,
- revenue-share terms change,
- the business changes direction significantly.
Changing a signed operating agreement generally takes the members' consent, as the agreement itself sets out. Draft the amendment, and have every member who needs to approve it sign.
Where HYVV fits
When you set up an LLC with Hyper Formation, the operating agreement starts from the members, ownership and management you entered. Documents are drafted from HYVV templates and the terms you set, signed inside HYVV, and stored with a SHA-256 fingerprint. HYVV templates are not reviewed by a lawyer for your situation.