What is an operating agreement?

An operating agreement is fundamentally a key internal document for a limited liability company (LLC), detailing the management structure and the operating procedures of the business. This document serves as a blueprint for how the LLC will operate, including roles and responsibilities of its members, the process for making decisions, and how profits and losses will be distributed.

It provides clarity and prevents disputes among members by formally outlining each member’s rights and responsibilities. Furthermore, it helps to establish the LLC as a separate legal entity, which is crucial for liability protection. This is particularly important for new businesses, as it can guide the day-to-day operations and address potential issues that may arise, ensuring smoother management and governance.

While other options touch on important legal or operational aspects of a business, they do not encapsulate the comprehensive nature of an operating agreement as it pertains specifically to LLCs, making the correct choice the one that directly addresses its inherent purpose and function.