The Governing Document
You Cannot Afford to Skip.
An operating agreement defines how your LLC is owned, managed, and operated. It governs member rights, profit distribution, decision-making, and what happens when an owner exits. Manay CPA coordinates your operating agreement with full attention to the tax and financial implications of every provision.
- Operating agreement drafting for single-member and multi-member LLCs
- CPA review of all financial, tax, and compensation provisions
- Available for newly formed and existing LLCs in all 50 states
Certified for guaranteed quality
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What Is an Operating Agreement?
An operating agreement is the internal governing document of a limited liability company. It defines the ownership structure, management framework, profit and loss allocation, compensation arrangements, and the rights and obligations of every member. Most states do not require LLCs to have a written operating agreement, but every LLC should have one — because without it, state default rules govern the business in ways that often do not reflect the members’ intentions.
For tax purposes, the operating agreement is critical. It governs how income is allocated among members, defines the nature of compensation payments, and establishes the framework that determines whether distributions are treated as guaranteed payments, ordinary distributions, or something else entirely. Manay CPA reviews every financial provision of the operating agreement to ensure it is consistent with the LLC’s tax treatment.
Steps
Structure Review
We review your LLC’s ownership structure, intended management arrangement, compensation plans, and tax election to understand what the operating agreement needs to accomplish before any drafting begins.
Tax Provision Identification
We identify every provision in the operating agreement that carries a tax or financial consequence — profit allocation, guaranteed payments, distribution timing, capital contribution requirements, and buy-sell terms — and advise on how each should be structured.
Agreement Coordination
We coordinate the preparation of your operating agreement with your legal counsel, providing CPA-level input on all financial and tax provisions to ensure the document reflects both the members’ intentions and the requirements of the LLC’s tax treatment.
Review and Execution
We review the final draft for consistency with the LLC’s tax election and accounting setup, confirm that all financial provisions are correctly structured, and advise on execution and record-keeping requirements.
Table of Contents
Why State Default Rules Are Not a Substitute
When an LLC does not have a written operating agreement, the state’s default LLC statute governs how the business operates. State default rules are designed as a fallback for businesses that failed to document their arrangements — they are not designed to reflect the specific intentions of any particular group of owners.
Under many states’ default rules, profits and losses are allocated equally among all members regardless of their ownership percentage, and all members have equal management rights regardless of their investment or role. These defaults frequently do not reflect what the members actually agreed to — and discovering this discrepancy after a dispute has arisen is far more expensive than drafting a proper operating agreement at formation.
Profit Allocation Must Have Substantial Economic Effect
The IRS requires that allocations of income, gain, loss, and deduction among LLC members have substantial economic effect. This means that the allocation must genuinely reflect the economic arrangement among the members — not just a tax minimization strategy. An operating agreement that allocates most of the income to a low-tax-rate member purely for tax savings, without that allocation reflecting the actual economic arrangement, will not be respected by the IRS.
Manay CPA reviews every allocation provision in the operating agreement to confirm that it meets the substantial economic effect standard, so the tax treatment of the LLC’s income is consistent with what the operating agreement provides and defensible under IRS scrutiny.
The Buy-Sell Provisions Govern What Happens When a Member Leaves
One of the most important functions of an operating agreement is defining what happens when a member wants to leave the LLC — through voluntary withdrawal, retirement, disability, death, or involuntary removal. The buy-sell provisions of the operating agreement govern who has the right or obligation to purchase the departing member’s interest, at what price, on what terms, and funded through what mechanism.
Getting these provisions wrong — or omitting them entirely — can result in an ownership dispute that is far more costly to resolve than it would have been to address in the original document. Manay CPA provides comprehensive financial and tax input on buy-sell provisions so they are correctly structured for both the current owners and any future transition scenario.
Single-Member LLCs Need an Operating Agreement Too
Many single-member LLC owners assume that an operating agreement is only necessary when there are multiple members with competing interests to define. This is incorrect. A single-member LLC’s operating agreement establishes that the LLC is a genuinely separate legal entity from its owner — a distinction that is essential for maintaining the liability protection the LLC structure provides.
Banks sometimes request the operating agreement before opening a business account. Lenders frequently require it as part of underwriting. Courts have looked to the presence of a proper operating agreement as evidence that the member treated the LLC as a separate entity rather than as an alter ego, which is the standard for maintaining the liability shield.
Frequently Asked Questions about Operating Agreements
Is an operating agreement required by law?
Most states do not legally require LLCs to have a written operating agreement. However, a few states — including California, New York, Missouri, Maine, and Delaware — do require one. Regardless of legal requirement, every LLC should have a written operating agreement because state default rules rarely reflect the members’ actual intentions and provide no protection in a dispute.
What happens if my LLC has no operating agreement?
If your LLC has no operating agreement, your state’s default LLC statute governs every aspect of the business that the agreement would otherwise address — including how profits are split, how decisions are made, and what happens when a member wants to leave. These default rules frequently do not match what the members intended, and discovering this after a dispute is far more costly than drafting a proper agreement at formation.
Can an existing LLC add an operating agreement later?
Yes. An existing LLC can adopt a written operating agreement at any time. The agreement should reflect the actual arrangements that have been in place among the members and should be executed by all members. Manay CPA assists existing LLCs with operating agreement preparation and with ensuring that the financial provisions are consistent with the LLC’s actual tax treatment and compensation history.
What is the difference between a guaranteed payment and a distribution?
A guaranteed payment is a payment to an LLC member for services or the use of capital that is determined without regard to the LLC’s income — similar to a salary. A distribution is a payment of the member’s share of the LLC’s profits. The tax treatment of each is different: guaranteed payments are deductible by the LLC and includable in the member’s ordinary income, while distributions reduce the member’s capital account. The operating agreement must correctly characterize each type of payment.
Does the operating agreement need to be filed with the state?
In most states, no. The operating agreement is an internal document that does not need to be filed with the state business registry. However, it should be signed by all members and kept with the LLC’s official records. Some states require that the operating agreement be available for inspection by members upon request.
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