What is an operating agreement and what does it do?

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What Is An Operating Agreement And What Does It Do

When setting up a business, it is important to be familiar with the legal tools to help the business owner do that. An operating agreement is one of those legal tools that can help protect the business owner and their business which is why it is valuable to be familiar with what they do and what should be included in one.

What to include in an operating agreement

An operating agreement can outline how the internal affairs of the business will be carried out including the percentage ownership of the members; voting rights and responsibilities of the members; powers and duties of the members and managers; distribution of profits and losses; when meetings will be held and with what frequency; buyout and sell-out rules for the business; and procedures for transferring interest in the business in the event of death

What does an operating agreement do?

Operating agreements can help outline the functioning of the business. An operating agreement can be used to protect the limited liability status of the business and clarify any verbal agreements there may be concerning the business. Additionally and depending on the business form chosen, without an operating agreement state default rules may apply to the operation of the business.

The use and purpose of an operating agreement can depend on the type of business form and there may also be different requirements for operating agreements in different states. It is important to be familiar with this distinction. Business law can help guide business owners through this and other concerns relating to drafting an operating agreement and setting up their business.


Michael Ritigstein is a Founding Partner of the firm concentrating his efforts in supporting the firm's litigation, corporate and estate matters. Mr. Ritigstein graduated from the University of Delaware in 1996 and Seton Hall University School of Law in 2000. In 2007 he received a Masters of Law in Taxation with a concentration in Estate Planning, from Temple University's Beasley School of Law.

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