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What is a Single Member LLC Operating Agreement?
A single member LLC operating agreement is a legal document that sets forth the rules and bylaws of a company. This operating agreement is often created along with the articles of organization during business formation and apply to single-member LLCs. Limited liability companies need operating agreements to protect their liability.
Does a Single Member LLC Need an Operating Agreement?
Even though a single-member LLC is only made up of one person, an operating agreement is still recommended. Here are a few examples of why it’s important for single-member LLC operations to file a formal operating agreement:
Liability Protection
One of the major reasons why business owners choose to file as a limited liability company is to separate their personal assets from business assets. This is desired since in the event a company is sued, the owner’s personal assets cannot be pursued. An LLC operating agreement helps to separate business affairs from personal affairs, which further helps to secure asset protection.
State Default Laws
If a single-member LLC does not file an operating agreement, they are subject to their state’s default laws. Default laws are state rules that designate who to do in certain legal situations. Even though these laws were defined to ensure business owners’ bases are covered, abiding by them can sometimes hurt business owners.
Operating agreements help make sure that an owner’s wishes are honored when certain events occur. For example, if a founder becomes incapacitated, state default laws might automatically transfer rights to ownership to the founder’s next of kin. However, this isn’t always a great solution, since their next of kin may not be qualified to run the business. Filing an operating agreement allows owners to specify exactly what should happen in these situations.
Banks and Investors
Members on single-member LLCs or joint ventures may find that their state does not require an operating agreement. However, banks and investors often require a copy of a company’s operating agreement before they will approve a commercial loan . This is true because an operating agreement is the best way to verify who owns the company, since the articles of organization list the agent, but not the owner.
Check out this article to learn more about why single-member LLC operations need operating agreements.
What to Include in a Single Member LLC Operating Agreement
Single member LLC operating agreements are legally binding documents that lay out the rules and bylaws of a company. They include information about who owns a company, what they can do, and what procedures to follow when certain scenarios occur. These agreements can also apply to limited partnerships and joint ventures, also known as a pass through entity .
Here is an overview of what to include in a successful single member LLC operating agreement:
- Basic LLC details: name, location, and purpose of the company
- Registered Agent: The person responsible for handling company documents, also known as a company’s registered agent
- Term of LLC: can be a set amount of time or “perpetual”
- LLC membership: for single-member operations, there will only be one person listed
- Financial instructions: how to handle profits, losses, bonuses
- Accounting details: who is responsible for accounting and which method (cash or accrual)
- Legal: indemnification and limitation of liability clauses regulate who is responsible in the event of a lawsuit
- Dissolution: what to do when a business shuts its doors
For more details about what should be included in a single member LLC operating agreement, check out this article .
How to Create a Single Member LLC Operating Agreement
Creating a single member LLC operating agreement is a vital part of the process of opening a new limited liability company. It helps defines company processes, procedures, and legal recourses that can be taken.
Creating a single member LLC operating agreement doesn’t have to be intimidating. Using an easy three-step process is the best way to create one.
Step One: Consider Hiring LLC Lawyers
Having the expertise of a qualified corporate lawyer is a great tool during the operating agreement creation process. Lawyers know the ins and outs of the law, which means they can advise company owners on what protections should be included in their agreement and which ones may not be necessary.
Lawyers with experience in creating operating agreements can also help make the process run more smoothly and be completed sooner.
Step Two: Compile Operating Agreement Information
The most important thing about an operating agreement is which terms are included in it. Company owners should collaborate with LLC lawyers to determine what company information should be included and which processes and procedures need to be outlined in the agreement.
Here are some examples of what information should be gathered for preparation of a single member LLC operating agreement:
- Basic details of the company
- Company purpose
- Member information
- Company duration
- Initial capital of the company
- Tax status
- Manager information
- Limitation of liability
- Profit and loss determinations
- Effective date and end date (can be perpetual)
- Signatures and dates
Step Three: Write Operating Agreement
After compiling all operating agreement pertinent information, it’s time to write the agreement. A corporate lawyer can aid in this process by drafting the full document for a business owner, or a template can be used to achieve this step. It’s important to ensure legal verbiage is concise and accurate, so the assistance of a lawyer is recommended for this stage of the operating agreement creation process.
Check out this webpage for an example of a single member LLC operating agreement template.
Image via Pexels by Teona Swift
What if an LLC Doesn’t Have an Operating Agreement?
If an LLC opts out of creating and filing an operating agreement, they are putting themselves at unnecessary risk. Since companies without operating agreements are obligated to abide by state default laws, they may put making certain decisions in the hands of state legislature, which is not always desirable.
Here is an example of what might happen to an LLC who chooses not to create a single member LLC operating agreement:
- Joanne forms a single member LLC to run a small retail operation out of her home
- Since she is the only member of the LLC and she knows how she likes to run her business, she opts to skip the operating agreement
- When it comes time to file her taxes, Joanne has a difficult time separating her business assets from her personal assets, which puts her at more of a risk for being audited
- An operating agreement would help Joanne in separating these assets since formal, written documentation would give clear instructions on how to keep the finances separate
Get more information about the importance of an operating agreement in this article .
Get Help with an LLC Operating Agreement
Are you ready to prepare and file a single member LLC operating agreement for your business? Talking with a qualified professional is the first step to ensuring your document is legally binding and all-inclusive of the necessary terms. Post a project on ContractsCounsel today to get connected with corporate lawyers who specialize in single member LLC operating agreements.
Meet some of our Single Member LLC Operating Agreement Lawyers
November 14, 2021
Terrence R.
I represent technology and emerging growth companies at all stages of growth, from startups to mature companies. My practice includes corporate and securities law matters, corporate governance, venture capital financings, and commercial transactions, including software and technology licensing agreements, and strategic alliances. I regularly provide guidance on a range of business and legal issues, including business modeling and go-to-market strategies.
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Jeff C.
Jeff Colerick has been practicing law for over 30 years and has devoted his professional career to providing clients with intelligent representation and personal care. His experience as a lawyer involving complex matters has resulted in a long history of success. Jeff has built a practice based on a deep understanding of real estate assets and corporate activities. He combines his industry knowledge with a practical and collaborative approach to problem solving. Jeff’s client relationships are strong because they are built on mutual respect. Jeff talks the language of real estate and understands that it is a vehicle to deliver your business strategy. Jeff provides practical, responsive, and strategic advice related to real estate acquisition, construction, leasing, and sale of a wide range of real property types, including office, retail, medical, industrial, industrial flex-space, mixed-use condominium, multifamily and hospitality. As leader of the Goodspeed Merrill real estate practice group, Jeff represents clients with commercial and residential transactions, purchases and sales, land acquisition and development, real estate investment and financing, financing liens and security interests, and commercial leasing and lease maintenance, including lease enforcement support and advice. The firm represents clients in matters concerning construction, lending, developers, contractors and subcontractors, cell site leasing, property and boundary disputes, common interest community law, and residential condominiums and planned communities.
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Harrison K.
Harrison Kordestani is an executive with over twenty-five years experience in entertainment and media, energy, technologies, and start-ups. Mr. Kordestani has also developed a specialized legal and strategic consulting practice representing select entertainment, oil and gas, mortgage lending, and technology start-up clientele. He is also deeply passionate about new technologies and has also actively worked in building companies in the video-on-demand, wearable tech, information of things, demand prediction and app-marketing spaces. As an attorney, Mr. Kordestani's focus has been on transactional drafting and negotiation and providing ongoing legal counsel, corporate compliance, and contract interpretation to numerous private individuals as well as companies in varied fields.
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Moss S.
Over 30 years of experience practicing commercial real estate and complex business litigation law.
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Abraham W.
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Patricia L.
Transactional Lawyer with 15+ years of international experience working for large corporations in commercial and regulatory matters, contracts, partnerships, mergers and acquisitions, arbitration, and governance. Highly experienced in structuring, drafting, negotiating, and managing a wide range of contracts. Provide training for lawyers and non-lawyers in contract negotiation and management. Effective deal counsel and conflict mediator. A strong business strategy background coupled with business plan development, risk assessment, due diligence, and partnerships.
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Dave Y.
I am available for data privacy and cybersecurity projects. I am CIPP/US certified through the IAPP. I have also taken coursework focused on the GDPR through the London School of Economics. In my past career I was an intelligence officer. I am well acquainted with information security best practices and I have experience developing and implementing administrative controls for classified information and PII. I have worked extensively overseas and I am comfortable integrating with remote teams. Feel free to reach out any time if you have any additional questions on my areas of expertise or professional background.