What Is an Operating Agreement? Why Every Illinois LLC Needs One (And What Happens Without It)

Every Illinois LLC is legally required to have an operating agreement. Yet a surprising number of LLCs operate without one—or with a skeletal, one-page document that fails to address the situations that actually matter. This guide explains what an operating agreement is, what it must contain, and what happens to your business if you don’t have one.

What Is an Operating Agreement?

An operating agreement is the governing document of a Limited Liability Company. It defines how the LLC is owned, how it is managed, how profits and losses are allocated, how decisions are made, and what happens when members want to leave, sell their interest, or the company dissolves.

Think of the operating agreement as the LLC’s constitution—it is the supreme internal governing document, higher in authority than any individual member’s wishes and enforceable between members as a contract.

Is an Operating Agreement Required in Illinois?

Yes. Under the Illinois Limited Liability Company Act (805 ILCS 180/15-5), every Illinois LLC is required to have an operating agreement. Unlike some states, Illinois does not provide a separate “default” operating agreement—if you don’t have one, the LLC Act’s default rules fill the gaps.

The agreement can be written, oral, or implied from conduct—but oral and implied operating agreements are extremely difficult to prove and enforce. You need a written operating agreement.

What an Operating Agreement Must Cover

1. Membership and Ownership Structure

Who owns the LLC and in what percentages? Are there different classes of membership interests (voting vs. non-voting)? How are new members admitted? This section establishes the fundamental ownership map of your company.

2. Management Structure

Illinois LLCs can be:

• Member-managed: All members participate in management and have authority to bind the company
• Manager-managed: Designated managers (who may or may not be members) control the company; non-manager members have no management authority

The management structure must be specified in the operating agreement and in your Articles of Organization filed with the Illinois Secretary of State.

3. Voting Rights and Decision-Making

What decisions require member approval? What is the voting threshold (majority, supermajority, unanimous)? Which decisions can managers make unilaterally? Common decisions requiring member approval include: admitting new members, selling substantially all assets, taking on significant debt, and dissolving the company.

4. Profit and Loss Allocation

How are profits and losses allocated among members? The default under Illinois law is allocation in proportion to each member’s ownership percentage—but you can customize this. Some LLCs allocate profits differently from losses, or create preferred return tiers for certain members.

5. Distributions

When and how are distributions made? Are members entitled to distributions on demand, or only when the managers decide? Who has authority to approve distributions? Tax distribution provisions (ensuring members receive enough cash to pay taxes on LLC income) are critical for pass-through tax structures.

6. Transfer Restrictions and Buy-Sell Provisions

Can members sell or transfer their interests freely? Or do other members have a right of first refusal? What happens if a member wants out? What happens on death, disability, or divorce of a member? Buy-sell provisions determine who can own your company and at what price—among the most important provisions for multi-member LLCs.

7. Dissolution

What events trigger dissolution? How are assets distributed on winding up? The Illinois LLC Act provides default dissolution rules, but they may not match what you and your co-members intend.

What Happens Without an Operating Agreement?

Without a written operating agreement, Illinois applies the default rules in the LLC Act. Some of these defaults are fine for simple situations. Many are not:

• Default management is member-managed, meaning all members can bind the company—even a minority member
• Default voting is per capita (one vote per member), not by ownership percentage—a 10% owner has the same vote as a 50% owner
• Default allocation is by membership interest, which may not reflect actual contributions
• No transfer restrictions exist by default—members can try to transfer interests without triggering buyout rights

FAQ: Operating Agreements for Illinois LLCs

Can a single-member LLC skip the operating agreement?

Legally, no—Illinois requires all LLCs to have one. Practically, a single-member LLC has less at stake because there are no co-owners to have disputes with. But a written operating agreement still matters for: establishing liability protection, bank account documentation, and planning for what happens if you add a member or pass the business to heirs.

Can I update my operating agreement after formation?

Yes. Operating agreements can be amended by the members in accordance with the amendment procedure specified in the agreement itself. Amendments should be in writing, signed by all required members, and maintained with the company’s records.

Fitter Law drafts custom operating agreements for Illinois LLCs, including multi-member agreements with buy-sell provisions and investor-ready LLC structures. Learn about our LLC formation services or view our flat-fee packages.