LLC Operating Agreements for the Indie Author

Name a sport with no rules. Or try to imagine any business or complex organization — government or private — that operates without a set structure in place.

The only thing that comes close is Calvinball, the made-up-as-you-go game from the comic strip Calvin and Hobbes, where the rules change constantly through running dialog between the two players. It's chaotic, confusing, and the strip always ends with both players exhausted and battered in the grass, questioning their own choices.

Sports without rules are doomed to failure. Try it the next time you play Monopoly with house rules nobody agreed on in advance. Businesses without a set structure are doomed the same way. This is what the Operating Agreement is for.

Picture your Operating Agreement as the rulebook for your LLC. It explains how the LLC will be managed, how taxes are paid, how profits and losses are distributed, and who gets what when the company is sold. A good Operating Agreement doesn't just inform everyone where they stand — it provides the structure for the LLC's operations. Your Operating Agreement is, by far, the most important document you will create for your business.

What Does an Operating Agreement Do?

Your Operating Agreement will:

• Define who the members of the LLC are and what percentage of the LLC each owns — their membership interest

• Define how the LLC is managed — members' rights and responsibilities, spelling out who is responsible for what within the company

• Define how taxes are paid and who handles the business side of the LLC

• Cover or define capital expenditures, spending authority, loans, credit lines, vesting periods, and the reinvestment of profits

• Define members' voting powers and rules for holding meetings

• Define how profits and losses will be allocated

• Cover buyout, or buy-sell, provisions — what happens when a member wants to sell their interest, dies, or becomes disabled

• Cover how the company may be sold or dissolved

This sounds like a lot for a small LLC — especially one that's just you. There are good reasons to have one anyway, no matter how small your company is right now.

Why You Need an Operating Agreement

While many states don't legally require an Operating Agreement, it's unwise to run an LLC without one — even if you're the sole owner. Having your own Operating Agreement lets you set the rules for your business, rather than letting it default to whatever rules your state imposes in the absence of one. Your Operating Agreement helps protect your limited liability status, heads off financial and management disputes before they happen, and helps establish your business's legitimacy in the eyes of the court.

This last point matters more than it might seem, especially for single-member LLCs. If a court finds that you're running an LLC — particularly a single-member one — without an Operating Agreement, it may treat that absence as a signal that you're not actually operating the business as a separate entity from yourself, and decide your LLC's liability protection shouldn't apply. Without that protection, your personal assets become reachable in ways the LLC structure was supposed to prevent.

You'll also need an Operating Agreement to work with a range of services related to your LLC — most of them will ask to see it to confirm you're operating in compliance with the law:

• A bank, to establish accounts and lines of credit for the LLC

• A bank or lender, if you're obtaining loans

• A title company, if you're purchasing or renting office space

• Accounting and tax professionals, for financial assistance

• Bookkeepers, for tracking finances and payroll

• Lawyers, for legal advice

• Potential investors or partners with an interest in your business

• Potential buyers of your company

An Internal Document

Unlike your Articles of Organization — covered in Filling Out and Filing Your Articles of Organization, where we discussed the principal office address becoming part of the public record — your Operating Agreement does not need to be mailed to anyone. You don't send it to your state, the IRS, or anyone else. An Operating Agreement is what's known as an internal document: it's shared only among the members of the LLC and the LLC's lawyers, accountants, and bookkeepers.

This means you keep a copy with your other business documents, and it will not appear in any public database — a useful contrast to the principal address privacy issue covered in the Articles of Organization article. Your Operating Agreement is where the specifics of how your business actually runs can live without becoming part of the public record.

Legally Binding — and Genuinely Unique to Your Business

An Operating Agreement is unique to every business. No two are exactly alike, and there's no fill-in-the-blank form you can complete, sign, and be done with — and even if there were, you wouldn't want to use it. This is a legally binding document, and the language it contains is the language you'll likely need at some point in the life of your LLC.

For that reason, we can't give you step-by-step instructions for writing one. What we can do is cover all the areas your Operating Agreement should address. Once you've worked through those areas, it becomes straightforward to find a qualified attorney who can take your information and produce the document you need. Like editing and cover art — covered elsewhere in this resource library as the two places worth spending real money — this is one of those things best left to professionals. We strongly encourage you to hire a lawyer to produce your Operating Agreement. In most states, this can be done for a few hundred dollars.

There are also websites that offer to generate an Operating Agreement from a questionnaire. These services are hit-and-miss in quality, relevance, and detail — if you use one, take the finished product to an attorney for a final check before signing anything.

What's Required

To complete your Operating Agreement, you'll need some basic information — partly simple demographics, and partly choices you and your fellow members will have made about the business and how you want it to run:

• The effective date of your LLC (see LLC Effective Filing Date)

• The name of the Registered Agent and the address of the Registered Office

• The general business purpose of the LLC

• Each member's percentage of ownership

• Names of the members and their addresses

• Each member's profit/loss-sharing percentage

• Vesting schedules

• Meeting requirements

• Management choices and definitions (see LLC Management for the Indie Author)

• Areas of responsibility

• Voting rules

...and a multitude of other things.

A good place to start is reviewing these items with your accountant, making the needed decisions on each with their guidance, before seeking out a lawyer to produce the final document. Many of these decisions relate to taxes and your state's particular business requirements — a good accountant can help you pick the right options and save real time and money when it's time to visit the attorney.

Key Items to Discuss and Agree On

Ownership, Contributions, and Distributive Shares

When an LLC starts, its members often contribute in different ways — cash, property, or services ("sweat equity"). In return, each member receives a percentage of ownership in the LLC. Members usually receive ownership percentages in proportion to their contributions, but this isn't required — members are free to divide ownership however they wish.

Critically, ownership percentage is not required to match profit sharing, also called distributive shares. The two don't have to correlate; it's entirely up to the members. These contributions and percentages are central to your Operating Agreement, and members should agree on them before drafting it — otherwise you may find yourselves ill-equipped to settle misunderstandings over finances and management later.

A Worked Example

Bill and Tom decide to build a publishing company together. Bill had the original idea, is experienced in business and marketing, and has saved enough to finance the start-up phase. Tom is an author with a library of books, a thorough understanding of the publishing world, and a network of fellow authors eager to work with them.

Once launched, they intend to share operating costs and work requirements equally. But since Bill is financing the start-up, handling the business side, and doing all the marketing, while Tom is contributing content and his network, they agree to a 60/40 split of ownership. Looking ahead, though, they both expect to contribute equally to keeping the company running and growing once it's launched — so they agree to a 50/50 split for profits and losses.

When an LLC distributes shares that don't correspond to ownership percentages — as Bill and Tom have done here — this is called a special allocation, and it needs to be defined explicitly in the Operating Agreement.

In addition to defining each owner's distributive share, your Operating Agreement should answer:

• What percentage, if any, of the LLC's profits must be distributed to members each year?

• On what schedule will those profits be distributed?

• Who determines how much profit gets reinvested in the company?

• Will there be retirement or investment accounts receiving a percentage of the LLC's profits?

• Will any profits be distributed to charity?

• Will distributions be adjusted to take advantage of tax benefits?

• Will the LLC pay each member enough to cover the income taxes they'll owe on their annual portion of the LLC's profits?

That last question matters more than it might look. An LLC owner pays income tax on the full amount of profit allocated to them, not just on what's actually paid out. When profits are reinvested back into the business rather than distributed, members are still taxed on that reinvested amount as if they'd received it. This is sometimes called phantom income, and it can catch new LLC owners off guard — a member can owe real tax on money they never actually received in hand. Each member will have different financial needs and tax situations, so this is an area where it's worth talking to a tax professional to make sure the agreement achieves results that work for everyone involved.

Voting Rights and Spending Limits

Most day-to-day decisions in an LLC don't require a member vote — requiring one for every decision would grind operations to a crawl. Most business decisions fall to whichever member is responsible for that area. But certain spending limits should apply to all members, to prevent one member from committing money the other thinks is still available.

Returning to Bill and Tom: Tom, responsible for producing the books, would handle hardware or software purchases needed to keep production going. Bill, running the business side, would handle marketing spend. They'd agree on a spending limit both adhere to — if Tom needs a new laptop or software over that pre-agreed amount, he and Bill discuss it first. Likewise, Bill consults Tom before exceeding the monthly ad budget. This keeps both partners aware of what the other is doing, while keeping the company solvent.

There are two common ways to split voting power among LLC members: percentage voting, where each member's voting power corresponds to their ownership percentage, and per capita voting, where each member gets one vote regardless of ownership share. Most LLCs use percentage voting. Whatever method you choose, the Operating Agreement must specify how much voting power each member has, and whether a majority or a unanimous decision is required to resolve an issue.

Ownership Transitions

Members of an LLC may come and go. The Operating Agreement should define what happens if a member retires, dies, or decides to sell their interest — this is the buyout (or buy-sell) provision, covering the procedures the LLC will follow whenever a member leaves for any reason.

Changing the Rules

An Operating Agreement is a working document — it can be changed at any time. Its purpose isn't only to protect you and your business, but to allow for your company's growth. Simple changes, like a member's change of address or a new registered agent, can be made by modifying the original agreement and presenting the new version to the members for signature.

More complex changes — one member leaving and another buying their interest, or the members raising capital with investors — are best handled by consulting an attorney. Changes like these can have real legal or tax consequences if not done correctly.

Any modifications require the signatures of all members to be legally binding. Signed copies should be distributed to all members, and the LLC's files updated with the new agreement.

One Last Thing

Operating Agreements are written in legalese — lawyer jargon, gobbledygook, mumbo-jumbo, whatever you want to call it. As such, they can be hard to follow if you're not used to that kind of language. Now is not the time to be shy or to take things for granted. If you don't understand a section, or you're unfamiliar with a term, that's the moment to speak up and research until you do — before you sign anything. An Operating Agreement is a legally binding contract between you, your business partners, and the state your business operates in, and you'll be held to it. Make sure you thoroughly understand what you're agreeing to before you sign.

Keeping This Document Organized

Given how central this document is — and how important it is to retain every version, as covered above — your Operating Agreement deserves the same careful storage as your Articles of Organization and EIN confirmation, covered in Filling Out and Filing Your Articles of Organization and Post-Filing Steps.

For LLCs with more than one member, the Operating Agreement's provisions around spending limits and consultation — like Bill and Tom's arrangement above — work best when both members can actually see the business's financial picture, not just their own area of responsibility. ScribeCount's consolidated income dashboard gives every member visibility into the LLC's overall royalty and direct sales income across platforms, which is exactly the shared financial picture that makes a spending-limit-and-consultation system in your Operating Agreement workable in practice rather than just on paper.

Of everything covered in this section on setting up your publishing company, the Operating Agreement is the one document that's genuinely yours — not a state form with blanks to fill in, but the actual rulebook for how your business runs, written by you and your members (or, more accurately, written by a qualified attorney based on the decisions you and your members make together). Take the time to work through every item above, get professional help producing the final document, read it carefully before you sign, and keep it — and every version that follows — somewhere safe. It's the most important document you'll create for your business, and it's worth treating that way.  

- Randall