Why Do I Need an Operating Agreement for My Single-Member LLC? 4 Reasons.
One of the advantages of forming an LLC, especially if you are a solo entrepreneur, freelancer, consultant or otherwise in business for yourself without any co-owners or partners, is that it’s a flexible choice of business entity. The LLC has minimal requirements for business filings and regulatory compliance. Unlike a C Corporation where you have to hold an annual shareholders meeting and deal with other regulatory paperwork, you typically do not need many business filings when you create a single-member LLC.
However, even if you own a single-member LLC, there is one type of legal document that you might want to create for your business: an Operating Agreement.
Learn more about how an Operating Agreement for a single-member LLC can help protect your business and personal finances.
What Is a Single-Member LLC?
Not every business is going to be “big.” Many entrepreneurs decide to form a single-member LLC so they can do business in an “official” and legally protected way, but without having to hire employees or deal with the regulatory paperwork and business filings of a larger business. Even if you are in business for yourself as a single person, such as a freelancer, consultant, professional services provider or any other business where it’s “just you” with no employees or business partners, you can set up a single-member LLC to give your business a legal identity that is separate from your personal finances.
What Is an Operating Agreement?
An Operating Agreement is a legal document for an LLC that lays out certain key provisions and aspects of running the business. Especially if there are multiple owners or members of an LLC, the Operating Agreement specifies who owns what percentage of equity in the business, what happens in case of disagreements between the owners and other matters.
But even if you have a single-member LLC Operating Agreement, you can still use this document to clarify and formalize certain key elements of your business operations, such as:
- How the business is organized
- How the business is managed (who is the business manager, who can make decisions on behalf of the business, etc.)
- How the business is funded and how income is distributed through the LLC to the business owner (this is important in case you contribute capital to the business in the form of a self-funded business or by putting money into the business)
- How the business owner’s personal liability is limited and separate from the business
- How the business succession plan will work (who will manage the business if you are not available?)
- Other miscellaneous provisions depending on your business, your state and your specific concerns and goals for the Operating Agreement
Different business owners will want to do different things with their Operating Agreement. This is a flexible, adaptable business document that can be written in a lot of different ways, depending on what legal protections or specifications you want to create in the Operating Agreement.
Why Do You Need a Single-Member LLC Operating Agreement?
If you own a single-member LLC, an Operating Agreement is not required. However, you might want to create one to give yourself some additional protections and clarifications about how your business is managed, how your business succession plan might work in case of your premature death or disability and other issues.
Here are a few reasons why an Operating Agreement can help you with your single-member LLC:
- Clarify the management of your company. It’s often a good idea to include a section in your Operating Agreement about “management” of your company. This clarifies that the business is managed by you, the owner. If your business name is totally separate and different from your personal name and identity, this is a good way to show in writing and in a legal document that you are the owner and manager of the business and no one else can claim ownership of your company.
- Limit your liability. Forming an LLC sets up a separate legal identity for your business that can help protect your personal assets in case of a lawsuit against your business. However, a single-member LLC Operating Agreement can also include some additional legal language to potentially strengthen and clarify these liability limits. You might want to include some legal language in your Operating Agreement to specify that “managers and members are not liable for debts, obligations or liabilities of the company.”
- Get additional credibility with lenders. If you want to build business credit, an Operating Agreement can serve as an additional official document to show lenders that your business exists as a legal entity, along with your Articles of Organization. There are various factors that affect creditworthiness for small business owners, and having an Operating Agreement is no guarantee of getting a loan. But it might be helpful as part of your overall loan application.
- Get additional clarity or protection from state default laws. If your LLC does not have an Operating Agreement, your LLC will be governed by the default rules of your state if you need to dissolve your LLC or if you pass away. This might cause additional delays and complexity for your loved ones when dealing with your estate. Specifying certain details in your Operating Agreement can help create an orderly succession plan for your business and can give you peace of mind that your business assets will be dealt with the way you wanted.
How Can You Get an Operating Agreement Sample Template?
When you form an LLC and start your business with Incfile, our Gold and Platinum packages include an Operating Agreement. If you choose our Gold package, an Operating Agreement template can be added on for an additional fee. You will receive an Operating Agreement that includes the most commonly used provisions and also customized information based on your specific business needs, which is based on the information you give us while placing your order.
You can write your LLC’s Operating Agreement on your own as well, but if you have concerns or specific complexities for your business, you might want to consult with an attorney in your state who can help write or amend your Operating Agreement to make sure it complies with state law and gives you the most protection.
Forming an LLC is a crucial step to make your business “official” in the eyes of the law and the banking system. Creating an Operating Agreement, even for a single-member LLC, can give you some additional clarity and protection. The Operating Agreement will define how you want to run your business, how your business profits and ownership equity are managed, how your business liabilities are kept separate from your personal finances and more. If your business owns significant physical assets or you want to create an orderly succession plan to pass down the business to your heirs and loved ones, don’t skip the Operating Agreement for your single-member LLC.